Whitman Howard's note with a 95p target price is worth a read as it outlines exactly why RTC deserve a higher rating than their sector comparators - and certainly higher than the current P/E of 6:
"2017 Prelims | Adjusted PBT ahead of expectations
Adjusted PBT at £1.5m for the 12 months ended December 2017 represented growth of 22% and was ahead of our expectation of £1.4m. In turn, this supported dividend growth of 13% against an expected 6%. Net debt was £4.4m though allowing for an unwind in receivables of £1.5m in January 2018, the underlying net debt position represents a significant improvement on the December 2016 position. Looking forward, we are leaving our adjusted 2018 PBT forecast unchanged representing adjusted PBT growth of 25% but note RTCs commentary of pursuing acquisitions.
Our 2018 forecast is underpinned by the material contributions expected from the SSE contract which becomes fully operational in 2018. We also introduce a 2020 PBT forecast implying a 3yr CAGR in PBT of 18%.
Trading on a 2018 PE of 6x and offering a dividend yield of 6%, we maintain our buy recommendation and price target of 95p. At this level, the PE rating of 9x is in-line with peers.
Benefit of having a diversified stream of income was demonstrated in 2017. ATA, GSS and the Derby Conference Centre (DCC) all reported increased operating profits which was able to offset the decline at Ganymede. ATA benefited from higher contract numbers and better cost control (the conversion rate was 25% vs 22.9%) which more than offset a decline in permanent gross profit. GSS was able to arrest its previous decline in earnings as a major client expanded its workload and GSS was able to win a new client this allowed the divisional operating profit to increase to £0.5m against an expected decline to £0.2m. The DCC benefited from being fully let following refurbishment in 2016, while the decline in operating profits at Ganymede from £2.3m to £2.1m was attributable to less demand on its Network Rail CP5 framework.
Dividend is sustainable. The dividend remains an attractive feature with RTC now yielding 6%. We believe this to be sustainable with the dividend cover being 2.4x and the actual expense being met from free cash flow.
RTC deserves a higher rating. c80% of gross profits (ex DCC) can be viewed as recurring and confirms our argument that RTC deserves a higher rating as it should not be valued as a cyclical recruitment company e.g. visible revenues exceed £125m over the next three years. Its valuation/growth profile compares favourably to its peer group (Empresaria, Gattaca, Parity and Servoca), all of whom offer lower earnings growth in 2018 and a lower dividend yield, yet all trade on higher PE ratings. This confirms our belief that RTC is undervalued and that 95p reflects a fairer value for a company with its superior growth outlook."
- GSS has won a new contract and is thriving
- Ganymede's new SSE contract is doing really well, and it has significant long-term recurring income
- ATA is also performing well in temp work
Plus RTC are promising a more aggressive growth strategy, with potentially acquisitions to come.
EPS is well up on last year, helped by a smaller tax charge. It would have been even better but for a small provision re Carillion, but it seems that Ganymede may well benefit in bigger style from Carillion's collapse.
RTC are looking pretty cheap at this price, particularly with such high guaranteed income.
With over 9p EPS forecast this year, things are looking good.
The last forecasts I saw from Whitman Howard were:
last year : 7.4p EPS, 3.3p dividend
this year : 9.8p EPS, 3.6p dividend
This puts RTC on a current year P/E of 5.7, let alone a 6.5% yield, which seems ridiculously cheap.
You'd be unlikely to ever see RTC trading on racy multiples. However, the SSE contract running until December 2020, plus the rail maintenance work, gives RTC an unusual degree of certainly for the sector, so could see a re-rating to a P/E of say 10 or 11 if things go smoothly.
Re-rating has not occurred.
No action on sp.
Trade volumes some days non existent.
Difficult to build a position of merit.
BOD are full steam ahead with their ambitious growth initiatives.
Look forward to the corporate update in January.
What are latest sp forecasts?
Nearer a £ than 50p
I note this week's news that Trump is sending another 4,000 troops to Afghanistan, and wants other countries like the UK to do more too. The UK is already sending another 85 personnel there. Which is all likely to be good news for RTC's GSS division:
Whitman Howard have issued a new note post-results, with a 95p target price and the following forecasts:
this year : 7.4p EPS, 3.3p divi
next year : 9.8p EPS, 3.6p divi
to Dec'19 : 11.2p EPS, 3.9p divi
With 76% of gross profits (ex DCC) recurring per Whitman Howard, RTC are a completely different kettle of fish than their sector comparators and should be rated at a premium as such - never mind on a current year P/E of only 8.9.
"Award of SSE Plc contract to provide Smart Meter Installers
RTC is delighted to announce that Ganymede Energy, a division of Ganymede Solutions Limited ("Ganymede"), has been chosen by SSE Plc to source, train and provide a minimum of 250 Dual Fuel Installers for its Smart-Meter rollout programme ("the Contract").
The initial term of the Contract signed on 25 July 2017 runs until 31 December 2020 and has a revenue value of £28m which will be realised over the initial term. The provision of Smart Meter Installers will commence in November 2017 with a phased training and deployment plan that will see at least 250 Installers deployed on a full-time basis. All installers will be provided fully accredited but will undertake additional training with SSE to ensure that they maintain the high standards of service and safety expected."
Commenting on the award, RTC Chief Executive Andy Pendlebury said:
'I am delighted that Ganymede Energy has been chosen to partner SSE Plc on this exciting long-term project. This partnership is another significant step for our Ganymede business in establishing itself as the market leading provider of personnel to safety critical environments.
RTC acquired Ganymede Energy (formerly RIG Energy) in December 2014 as part of its diversification strategy for Ganymede and the wider group. Ganymede Energy has performed solidly since its acquisition and under new management the business has built a reputation as one of the UK's most respected suppliers of engineers to the domestic energy and utilities sector. Ganymede Energy's impressive organic growth alongside the existing strength of Ganymede's Rail division with its long-term contract with Network Rail, firmly establishes Ganymede as both an industry leader and a fundamental pillar in RTC's future success strategy.
The Board is extremely proud of Ganymede and the Ganymede Energy team.' "
I attended the AGM. Most importantly, I was reasonably encouraged by what was reported in terms of trading:
- the Chairman was very firm in describing current trading as "satisfactory". IMO the Chairman is of what might be termed the "old school", where there's no need for hyperbole, or for 10 words where one will do. As proven by the trading update!
In other words, if he's happy to describe overall trading as "satisfactory" I would translate that as "good"
- the AGM itself was unilluminating re trading info. However, there was mention in terms of growth catalysts for Ganymede's smart metering business, and for ATA growing as a beacon of quality against other similar-type businesses. And post-meeting I had a discussion regarding smart metering which gave me much more encouragement as to potential future workloads in this area
- the Chairman described RTC as unaffected by extraneous factors in the general economy, presumably because Ganymede and GSS in particular have strong recurring revenues
- the DCC is now basically completed and 100% available for revenue/profit-generation
- GSS is more likely to strengthen rather than weaken in future as regards Afghanistan given the situation there
- I proposed that RTC should proactively get out and present to private investors via presentations at Equity Development, Proactive, Blackthorn Focus, Mello etc. This is what will get some liquidity and interest in the shares, as apart from Oryx and a few others RTC are indeed too small for most institutional investors.
This proposal was welcomed and seemed to be particularly taken on board by the FD.
I would say that actually RTC's business is overall of HIGHER quality than most of its sector rivals. This is due to Ganymede's and GSS's high recurring/contractual income with Network Rail etc.
The smart metering opportunity in particular offers a transformational opportunity to the group. If this results in a long-term installation contract or two similar to Ganymede's Network Rail contract, you won't see the share price for dust given the small free float.
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