Stockwatch: this major stake change may hint at value

Education technology supplier RM (LSE:RM.) has been a volatile, trending downwards in the noughties since its heyday in the late 1990s media and technology boom.

More recently, in 2019 it traded around 300p and made a net profit of £24 million on £224 million revenue in its financial year to that November. But it slipped into losses, and its problematic hardware supplies division was closed to focus on software and services.  

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The share price does however appear in a steady if volatile uptrend from 23p some three years ago, and a standout development this week is that nearly 27% of the issued shares changed hands on Wednesday at a premium price of 87p. Yesterday, the price rose 10% to 91p and the offer price is today 93p.

Source: TradingView. Past performance is not a guide to future performance.

Assessment division shaping up as “crown jewels” business

Intrigue is offered by this global provider of software in support of exam-awarding bodies, universities and governments, to digitise their assessment. In RM’s November 2024 financial year, its contracted order book more than doubled to near £96 million and includes high-profile customers such as the International Baccalaureate “IB” and Cambridge University Press & Assessment. It is a big endorsement for the transition to digital-based assessment, and should advance the division from slightly lower 2024 revenues near £40 million relative to £166 million overall.

On 5 June, a global accreditation platform - RM Ava - was launched, which consolidates existing assessment tools onto one cloud-based platform, to transition from paper to digital learning and examinations.

The Technical Teaching Solutions (TTS) side, a provider of education resources for early years, primary and secondary schools across the UK and to 114 countries internationally, edged up 2024 sales to near £54 million and has launched AI generated learning tools for the national curriculum.

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RM’s Technology division however slipped to £54 million revenue, impacted by challenging school budgets and prior election uncertainty. But it has won several substantial contracts set to benefit the current financial year and should also improve revenue quality via longer-term recurring fees.

Closing the loss-making Consortium business, a provider of hardware and other resources, was said at the March annual results to mean all parts of the group now being operationally profitable at an adjusted level.  

Does this now imply value?

Relative to a market capitalisation of £76 million, you could say this roughly represents where annual revenue of the Assessment division alone is heading, the other divisions somewhat “in for free”. Hence the sum-of-the-parts valuation is potentially attractive assuming all areas of the group do proceed as profitable.

Consensus looks for £6.3 million net profit on £175 million revenue this financial year, rising to £8.5 million profit on £183 million revenue in 2026. While this seems modest relative to the CEO’s optimism on revenue, a 24 June update did cite interim revenue 7% lower at £73 million due to pressure on school budgets and delay in government funding for key initiatives in technology. Given the dire UK fiscal position, you wonder if this can improve at all soon. Anyway, RM has taken out substantive costs so should at least cope.

It implies an undemanding forward price/earnings (PE) multiple around 10x, although dividends have not been paid since the November 2021 year. And payouts look some way off given nearly £60 million of net debt which has involved a substantive £7 million annual cost, swallowing 72% of adjusted operating profit even after finance income.

This has manifestly overhung the equity value for a small cap, presenting risk of a dilutive share issue if trading were to deteriorate and lenders get tough.

A 24 June update did however cite the £70 million debt facility extended from July 2026 to July 2027, with covenants re-set. This affirmed the board previously saying it was confident of negotiating a further facility and it was not a material uncertainty.  

RM 
Year-end 30 Nov

Source: historic company REFS and company accounts.

Share buying despite disappointment with government promises

When I made a speculative “buy” case nearly two years ago at 62p, it was partly out of expectation that an incoming Labour government would be good for educational spending. Obviously, various hopes surrounding Labour have been dashed due to the UK’s fiscal bind.

I continue to think RM has overall merit as a patient turnaround stock, made more intriguing by the massive share trades at around 87p relative to the published spread of 83.0-84.6p and 49,000 shares traded.

Yesterday lunchtime came an announcement that Lombard Odier Asset Management has taken a 12% stake. Implicitly then, further “holding” announcements are worth watching for, revealing who else bought in and who sold.

The current CEO has been in place since January 2023, long enough for actions to start bearing results. RM admittedly does boil down to a marketing success story on its Assessment side, albeit as yet in a minority 24% of group revenue in the last financial year, with TTS at 44%. Given the UK represented 74% of TTS’s 2024 revenue, constraints on government spending help explain softer revenue, yet there were declines abroad too.

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“A strong foundation for future growth” was asserted at the 18 March final results, with a “new operating model and management team fully established, including a new chief operating officer”. A further £10.6 million of annualised cost savings were cited, as if this might be additional to £20 million already achieved.

The boss backed his words, buying £56.6k worth of shares at 99.1p last May, a higher price even after yesterday’s 10% jump. Indeed, there has been a steady stream of director buying involving seven of them from March 2023 at prices from 50p to 75p. The last time any director sold was £52.6k worth at 215p in 2021.

Balance sheet must improve in the longer term

Not surprisingly for an increasingly intellectual property-driven business, goodwill/intangibles constitute 210% of £17.1 million net assets, with the debt also £42 million trade payable bringing down net assets. Also not great is how net current assets are just £171k, but at least cash was £8.2 million.

The 24 June update further cited how triennial valuations for defined benefit pension schemes showed a £10.5 million surplus as of May 2024, versus a £21.6 million deficit in 2021. It implies a benefit for free cash flow given no further contributions beyond a remaining £1.8 million from a 2023 agreement.  

First-half results are due 15 July. Mind, RM is second-half weighted, and obviously the market will be interested whether the outlook is moving towards all elements of the group progressing, or whether this remains a story of Assessment doing well but checked elsewhere.

You could say, given several institutional holders implicitly decided to exit at this stage underlines how RM has its contradictions. Ideally you would weight a more conviction-based turnaround with an all-round positive macro context.

But given its size, and unless you are on the institutional broker’s list with your own investment company, liquidity makes it hard to go overboard.

The offer price remains firm at 93p today, with one such trade of 80,000 shares, indicating this is not too tight a market. Despite it looking some years before debt is mitigated to resume dividends, I retain a patient “buy” stance.

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.