RM plc which features in the Compound Income Scores portfolio has announced final results for the period ending 30 November 2015. These showed the expected decline in turnover as they moved away from selling low margin computer hardware and focus on supplying software and services to educational establishments and exam boards etc. The turnover at £178.2m was down 12% as a result and seemed to be slightly behind forecasts which were for £179.6m according to Stockopedia. The earnings and dividends were however better than forecast a 16.2p v 15.6p and 5p v 4.8p respectively. It is also worth noting that the eps figure for this year was also ahead of the forecast of 16p for the current year suggesting that there may be some scope for upgrades to forecasts.
Aside from that the commentary was a bit mixed but generally seemed OK and it is encouraging that the margins have increased to 10.2% overall. There was no real outlook statement or comment on current trading so if you are interested then I suggest you read their announcement for the full details. The closest thing to an outlook statement was in the headline comments from the Chief Executive which seemed a bit downbeat when he said:
"Market conditions in the UK Education sector will continue to be subdued as a result of increased pressure on school budgets. Our strategy continues to focus on retaining a leading market position for all three businesses whilst maintaining our stronger operating margins."
Taking the results at face value and using the currently reported numbers and last weeks closing price of 162p puts them on a 10x PE with a 3.1% yield which is covered 3.2x by earnings. On an Enterprise Value basis deducting the £48.3m of cash they had at the year end from the current market cap of £133.9m gives an EV of £85.6m and given the margins would suggest an incredible EBIT / EV yield of 20%.
However, there is also a Pension deficit which at 30 November 2015 they say the IAS 19 scheme deficit (pre-tax) was £21.9 million (2014: £26.8 million) but they also said that on 11 December 2015, agreement was reached with the Trustee of the RM defined benefit pension scheme with regards to the triennial valuation as at 31 May 2015. The deficit was agreed at £41.8 million (31 May 2012: £53.5 million). Their deficit recovery plan comprises an initial cash contribution of £4.0 million into the Scheme and £4.0 million into the escrow account previously established for the purposes of further risk mitigation exercises, together with deficit recovery payments remaining at £3.6 million per annum until 2024 (previously 2027). These funding plans will be assessed at future triennial reviews.
So if you adjust for this conservatively, although as described above, they do have recovery plans in place, you could just ignore the cash as this is offset by the Pension liability. On this basis the EBIT / EV yield (Market cap. in this case) would still be a generous 13.6%. On an EV/ Sales basis or market cap to sales this comes in at 0.75x whereas with margins of over 10% I would have thought this should be closer to perhaps 1x which would give potential for 30%+ upside and could suggest a price target of 218p or so. If that were achieved this would leave it on 13.5x with a 2.5% yield based on this years forecast dividend of 5.5p and last years 16.2p of earnings and this would bring the EBIT / EV (Mkt cap) yield down to 10% all of which would seem reasonable to me. However, whether the market is prepared to re-rate this one remains to be seen as it has rather languished at its current levels for a few months now, although that has been against the background of a weak market so it has been showing some relative strength if not absolute price performance.
Thus continued patience will be required on this one if you should choose to invest in it, but it will remain in the CIS portfolio for now as it continues to look good value and scores well with a CIS of 95. Mr Market doesn't seem to like it though as he has marked the shares down by around 6 to 8% to around 150p and close to some potential support from lows about a year ago. This would also bring it closer to a zero growth type of rating which is perhaps not unreasonable given the history of this one. Perhaps the market is also disappointed by the market background comment, although this probably shouldn't be great surprise to anyone. But it does seems a bit harsh to me given the changing nature of the business and might therefore be a buying opportunity, but maybe I'm missing something?