Tide has turned at RM

An incredible rally between July last year and June 2014 saw RM shares surge by almost 170% as investors bought into the school technology supplier's turnaround plan. They've slumped by almost a third since, but RM now thinks it will make much more than expected in the second half. Big upgrades have followed, and with the rout over, RM shares look remarkably good value.

Numis Securities is impressed. The broker has upgraded adjusted pre-tax profit forecasts for the year to November by 24% to £17.9 million, giving adjusted earnings per share (EPS) of 16.6p. Profits should be only fractionally down in 2015, an 18% upgrade.

RM decided to stop making PCs last year, instead focusing on higher margin software and services. A decision by the coalition government to wind down Labour's Building Schools for the Future (BSF) programme had hurt demand, too.

But business has been better-than-expected during the third-quarter and costs at the core Education Technology division are below forecasts. Even the soon-to-be-defunct personal computing devices operation has made more than anticipated.

Elsewhere, good revenue and margins at school materials supplier TTS is keeping the smaller Education Resources unit ahead of plan, while the assessment and data services division, which offers things like e-marking, is hitting forecasts.

After testing significant technical support at 122p, RM shares have rocketed by 15% to 140p, yet still trade on just 8.4 times forward earnings. Strip out forecast year-end net cash of £43.4 million, or 53p per share, and that drops to a miserly 5.2 times. Remember, too, that RM’s cash represents over 37% of its total market capitalisation.

RM shares are also cheap on an enterprise value-to-net operating profit after tax (NOPAT) basis, trading on a lowly 7 times 2015 estimates. Numis reckons it should be nearer 11. At that level, the shares could be worth 205p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.