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Returning to RM plc 27 October 2013

 

Back in July, I took a quick look here at RM plc, after it had delivered its Interim results. At the time, I confessed to being unfamiliar with the company, which is one of the great things about this game, as it is always nice to view something different that has previously been off the radar.

 

The shares at RM have actually performed very well since then, rising from 71p to a current £1.16p although they had touched higher before coming off a bit last week. In fact, at one point the shares were down 16p to £1.08p after the company announced on the 23 October its intention to exit the hardware side of its business which focuses on supplying the education sector with personal computers and complementary devices.

 

It is of course never good to hear of people losing their jobs and in this case, it amounts to some three hundred people over the next twelve months.

But, from a strategic and logical perspective of the business, it would appear to make good sense as that segment of its market is not only low margin, but declining too.

Certainly the initial mark down of the shares seemed overdone and they duly recovered to the current level, as someone appeared happy to mop up the slack.

At the time of the interims, the board had expressed its intention to concentrate on further efficiency savings along with a focus on higher margin areas of business, so it should perhaps have come as no surprise in relation to the announcement.

 

And that ongoing theme was further reiterated last week, with the company stressing that it will expand its software and services offering within that division which should by 2015 result in much improved margins.

The decision will of course incur one off costs, which according to the company, will come out at £10m and that is perhaps what sent some holders rushing to the exit door.

But, as I noticed in my previous comment on the company, it sits on a serious cash pile of just over £50m that accounts for a large chunk of its £110m market cap, which should in turn act as a buffer for share price weakness.

 From an operational point of the business going forward, management appears to be in tune with the need to change within its market, hence the decisions that have been made, while equally it has managed to maintain profits along with dividends that have been adequately covered.

Broker Numis was back in July pencilling in pre-tax profits of £9m, but subsequently upgraded that, after the company announced last month that it anticipated a stronger second half than previously envisaged.

 

The last forecasts that I am aware of anticipate pre-tax profits now coming in at £15.4m giving EPS of 12.8p implying a PER of 9 which looks interesting, particularly when taking into consideration that cash pile.

But, given previously flagged revenue falling from the conclusion of the Building Schools for the Future project and costs associated within that sector, pre-tax profits for 2014 are now forecast to drop back to £7.3m.

 In the longer term scheme of things though, that may only prove to be a   hiatus, as a reassessment and repositioning of the business, from the strategic decisions made, come into play further down the line.

 

But what really intrigues me here, is the intention of the board in relation to the cash.

Certainly there is scope for a one off special dividend, or plenty of room to raise the current annual payment, which as already mentioned is already well covered. Or, perhaps there are one or two earning enhancing acquisitions that have been earmarked which could tie in well with the current direction.  

There is of course that old fly in the ointment, the pension deficit which has to be mentioned, although the board appears to have measures in place to reduce that over time.

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