I recently wrote up my analysis of Sagentia plc which had undergone a radical transformation in the last couple of years. During this I discovered that the chairman, Martyn Ratcliffe had also taken over as Executive Chairman of RM plc in 2011 so thought it was worth checking out. As it turns out Mr Ratcliffe will step down from the board soon so I cannot rely on his good stewardship as with Sagentia, however he has restructured RM in the short time he’s been there and has a considerable shareholding still.
The Business
From the 2011 Annual Report:
“The Group’s principal activity is the provision of products and services to the UK and international education markets. In the period covered by this report the Group’s products and services were provided through three segments: Learning Technologies, Education Resources and Assessment & Data. Following the strategic review announced in September 2011, from 1 December 2011 the Group is organised in four operating divisions as follows:
Education Technology: a UK-focused business supplying IT hardware, network, Internet services and related installation and support;
Managed Services: a UK-focused business providing implementation, management and support of IT infrastructure in schools and colleges, including Building Schools for the Future (”BSF”) contracts;
Education Resources: a UK and international added-value distribution business offering a wide range of curriculum products and materials to schools, including special educational needs environments;
Education Software: a UK and international business providing assessment, data solutions, school management systems (“SMS”), learning platforms and other software.”
The chairman has refocused the group on profitable operation, rather than revenue growth and unprofitable overseas expansion. He has also greatly reduced working capital which has freed up lots of cash on the balance sheet and put it in a much stronger position.
The group is also engaged in what is a risky business, its client is the UK government which will cutting back on expenditure for the foreseeable future. However it has a very strong foothold in this sector which will likely continue even with funding cuts.
The Board
Although Mr Ratcliffe is stepping down soon,in 2011 there was an overhaul of the board with many long standing members leaving for good. This means the company is unlikely to slip back into its old ways, however from an investors standpoint it’s hard to know how effective the board or new CEO will be with shareholders money.
Martyn Ratcliffe was awarded 1,000,000 share options exercisable at 51p from 2014. However in order to become eligible the closing price must be above 100p for a period, and he must have bought 2.5 shares per option himself before November 2012. His last purchase was in April 2012, buying 600,000 at 80p each. He owns 3.34% (3.1m shares) of the company so has gone above what would have been required which is a good sign.
Company Financials
The latest preliminary financials released show a continued decline in operating profit on an adjusted basis. It also notes an impending decline in the Building For Schools (BSF) contracts from 2014 onwards and decline in all its other areas stating this decline will continue for the foreseeable future. Overall profit margins have improved however as central costs have been hugely cut.
Looking at the cash flow statement, the depreciation charges and amortization appear to cover the cash spent on capital and intangible assets hence reported profit appears to be a good yardstick to use for owners income. Cash flow has been very high over the last few years as working capital is reduced.
On the balance sheet is has a net cash position of £37.8m which is substantial. It has not been indicated what this will be used for however. The other major balance sheet item is the pension fund deficit. This is based on assumptions of a 6.5% annual return on equities and 3.4% on bonds gilts and cash. These are fair but I wouldn’t say conservative.However salary increases and CPI have been assumed at 2.4% and 2.3% respectively. These assumptions I would call more suspect with the current monetary policy.
The board has agreed to pay £4m next year and then £3.6m over the next 15 years. For my purposes I will just assume £4m is an indefinite cash outflow. Adjusted profits after tax in 2012 were £10m, which seems reasonable as a proxy for owners earnings. Minus £4m in pension fund contributions gives £6m.
Valuation
Predicting future earnings is difficult in this case given the declining business. It is not even clear whether they will even remain profitable in the future. Martyn Ratcliffe is all for reducing operations to remain profitable, but will the board he’s leaving behind be like-minded?
RM currently has a market cap of £72m, which minus the £38m in net cash is £44m. That’s 7.3x the £6m in pension adjusted earnings. For me that doesn’t appear particularly attractive for a company facing large headwinds so I won’t be investing.
Disclosure: RM, no position
Investing Sidekick
Founder of Investing Sidekick. Works as a research analyst and is an avid value investor, always searching for undervalued shares.