RM (RM.)


Still room in portfolio for RM

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CORRECTION. Due to a glitch in my spreadsheet some of the figures in the blog below are incorrect. RM’s 10 year PE is 14, not 12, and and net profit has grown about 3% a year over the last 10 years and 7% a year over the last five years, not 20%. This makes RM look more expensive and less desirable than I figured and I will post a revised and corrected blog when I have had a rethink. Sorry for the errors. feast and famine Managers at RM (RM-) must be wondering what they must do to impress investors. A third consecutive year of record profit ended in September, and the company has maintained or increased the dividend every year since it floated in 1994. It’s share price is no higher than it was in 2005 and last year it temporarily fell to a five-year low. That short-lived scare may turn out to be a salutary tale for short-term investors. RM’s price dived when the new government cancelled Building Schools for The Future, funding to modernise Britain’s classrooms, but revived when it confirmed that school budgets will increase modesty in real terms. RM manufactures, designs, and supplies computers (like the robust RM One) and related technology, networks (RM Community Connect 4), learning platforms (Kaleidos), and administration systems (Integris), to schools and local authorities mainly in the UK. It has two newer divisions:

  1. Classroom resources: software, music resources, art supplies, and teaching and learning aids for special needs.
  2. Assessment and data: testing, marking, and analysis for examinations boards like ACCA and the International Baccalaureate.

13% of turnover now comes from relatively new business abroad, mainly the US and Australia. I like RM. As a former teacher with an interest in technology, I think our future wealth and happiness is dependent on our investment in education now and IT can help. I also believe the most successful companies look after all their customers and staff as well as shareholders. So the fact that RM trumpets surveys showing growing customer and employee satisfaction enthuses me. But RM’s up against formidable competition in some areas, for example the big computer manufacturers, and the cold-hard figures are mixed. Since 2005, RM has prospered from sustained government spending on schools. A return on equity of 20% or more is very good, but growth seems to come in waves and the expansion of the past five or six years was preceded by five years of (relative) famine, which was preceded by earlier years of feasting. In the 90's RM helped put computers and networks in schools, but by 2001 the schools were switching from buying hardware to making better use of it, forcing RM to diversify. A second wave of government investment followed with the BSF, but now the company says its Learning Technology business, its biggest division by revenue, will be subdued for some time. Meanwhile, it should benefit from existing BSF projects, which will take years to complete. Despite its recent profitability, overall shareholder wealth has only grown by an average of 7% a year since 2001. Since 2005 it's grown at a healthier 11%. Since RM has increased net profit by about 20% a year and, other things being equal, net profit is either distributed as dividends or retained as assets in the business, I'd expect shareholder wealth (the cumulative dividend per share added to net asset value per share) to increase roughly in tandem. All other things aren't equal though, and I suspect the company's pension fund is gobbling up some of the difference. It's deficit has widened from £3.3m in £2007 to £12.4m in 2010. Whether its pension liability will continue to impinge on shareholder wealth is imponderable. It depends on actuarial assumptions about mortality, interest rates, inflation and future salaries, and the performance of stock markets. The outlook for the business is also uncertain. RM would like us to believe it is sufficiently diversified in terms of products and geographies to suffer less in subdued times, but that too remains to be seen. In the US, a potential growth market, RM is much smaller, the market is much bigger, and US public schools are less-well kitted out than out than ours. The cynic in me fears RM is changing its financial year end in 2011, effectively lengthening the year by two months, so the figures won't look so bad next year. But I think education is still a long-term growth market and the shares are not expensive, so I'm keeping RM in the Thrifty 30 for at least another year. The company is largely financed by customers and suppliers, bank debt is only 5.8% of total assets, and although that figure has risen slightly since last year an F_Score of 7 indicates RM’s in good financial health. At 12 times average earnings it’s not in bargain territory, but I still think the shares are cheap. - Thrifty 30 updates The Thrifty 30 portfolio (updated 4 Jan) Model army manufacturer Games Workshop blames itself for falling sales, not the bad weather Dry cleaner Johnson Service should meet expectations, although it was affected by weather. And auto engineer Ricardo reports signs of recovery in all its markets.


I was really surprised by RM's latest update, having closely watched the clobbering Promethean World got at the end of the year.

Maybe I'll take a closer look on the back of your post.

Hi Monevator, unfortunately there are a couple of errors in the post. I have posted a correction and will come back with a new assessment later in the week.

All the best, Richard.

[...] some of the figures I’d quoted were wrong. I  published the correction you can see at the top of the article, finished off a blog about Titon, and then returned to RM to reconsider whether I was right to [...]

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