Thursday, Dec 07 2017 by

RM (LON:RM.) is a transforming business. The process seems to me going well.

I've owned the stock for near 2 years and it has not been comfortable. It's basically two businesses, one dying and one doing well in pretty tough environment. The dying is hardware and physical IT related stuff for schools. The living is software and related curriculum and exam services. Dying bit has caused revenue to decline a lot. But the living piece has been making money and tending to grow. In isolation the margins on living business are excellent. The dying is about in for now so we should be looking at a full living unit from now on.

Until about two years ago they were in a great cash position. Balance sheet still solid after acquisition but net cash of £60m has moved to debt of £10m. However, the cash rich position was flattered as a chunk of it related to prepayments for future services (hardware stuff I think but cannot recall without looking up notes, it might have been receivables for services already provided, but the point is that it caused a cash surplus...and just writing this quick at the moment without reference to notes). They used a considerable amount of cash to make an acquisition earlier this year plus they also made payments to manage pension deficit (including one-off of £12m a year or so ago and then ongoing £3.5m ish).

Obviously, budgets at schools are pinched so its a hard to make money...so they are doing something right in a tough market.

I like RM as I think:
1) Management seem competent
2) Transformation plan is pretty clearsighted (and well executed so far)
3) Acquisition makes sense
4) They are performing in a tough market (live with that then there can be big profit surprise when things lighten in UK schools and/or they make inroads in a new market)
5) They have dealt with their pension deficit well and used cash to close it.

I am rather bearish on equity markets (that said I think domestic UK is relatively good value). It has made me very biased to special sits, turnaround and capital cycle stories that I think are independent from broad market or economy. I am wary of paying or chasing growth. In that context RM makes sense for me...not too ambitious, downside protected and can make its own good times.

After today's rally it looks like the multiple will still be 7-8x. That looks super cheap for something with margins like RM and the ability to grow earnings. I don't have a price target though as everything depends on how things fall out from ongoing transformation and integration of acquisition. That said, I think I'll get at least another 50% out of it. I think that a stop to top line revenue reduction will bring interest and then as a secondary factor (and obvs it is should be the primary but that ain't how investors work!) it will be whether they can get back on a good free cash flow generation groove.


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RM plc is engaged in supplying products, services and solutions to the United Kingdom and international education markets. The Company operates in three segments: RM Resources, RM Results and RM Education. The RM Resources segment consists of TTS Group Limited (TTS), which provides resources used in schools mainly through a direct marketing business model with goods supplied from centralized distribution centers. The RM Results segment provides information technology (IT) software and services to exam boards and professional awarding bodies to allow e-assessment through the use of on-screen exam marking (e-marking) and on-screen testing (e-testing). The RM Education segment is a United Kingdom-focused business supplying IT software and services to schools and colleges. The Company's products include RM Integris, the Company's cloud-based school management system, as well as offerings include RM Unify, RM Easimaths and RM Easiteach. more »

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