Gamble of the week: Classroom IT specialist
By
Paul Hill Jan 27, 2012
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When I was a lad in the 1980s, teachers were equipped simply with blackboards and chalk. Nowadays, classrooms are kitted out like the flight deck of the Starship Enterprise. Much of this technology upgrade is thanks to the likes of IT specialist RM.
The firm has been equipping schools with interactive white-boards, computers and wi-fi access for years, but has recently been hit by the government’s cuts in education spending. All forms of public expenditure on learning will fall by 13% in real terms over the next four years, due in part to the cancellation of Labour’s flagship ‘Building for Schools’ programme.
However, it’s not all bad for IT providers. IT is one of the most important subjects on the national curriculum, with knowledge of how to use and write computer programs seen as vital for today’s children.
Meanwhile, RM Group has been undertaking considerable self-help measures since a profit warning in September. Martyn Ratcliffe (who cut his teeth at Dell and Microgen) was appointed executive chairman, and duly invested £180,000 in the shares in November.
He has jettisoned the loss-making foreign units, along with disposing of a British furniture retailer, a payment card business and a joint venture with Lego. Staff numbers have been reduced by 23% over the past year, saving £12m annually after £5m in one-off costs.
RM Group (LSE: RM)
House broker Numis is forecasting 2012 turnover and underlying earnings per share of £272m and 13.2p respectively. That puts the stock on a frugal price/earnings ratio of less than six. The dividend is likely to be passed this year, despite the fact that the firm has net cash in the bank. So I would rate the group on a 2013 EBITA multiple of eight. Adjusting for the £7.4m pension deficit and discounting back at 12%, that delivers an intrinsic worth of 90p a share.
What are the risks? The biggest risk is another round of public-sector cuts. But I think it is unlikely education would bear the brunt, since this would seriously handicap the nation’s long-term prosperity. There are also pricing pressures as well as a danger that the restructuring plans could disappoint.
However, with a strong position in a strategically important sector, RM Group offers good upside for the more adventurous. Preliminary results are due out in February.
Rating: BUY at 68p (market cap £62m)
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