Educational IT and resources group RM (LSE: RM) jumped today, rising as much as 17% at one point after the company released an interim management statement, showing that trading for the three months from June to September had progressed ahead of expectations.
The company reported lower-than-expected costs and higher-than-expected profits across all of its divisions. As a result, RM now expects a significantly more profitable second half than was previously anticipated.
But even after today’s impressive trading update, and subsequent gains, RM still looks like an attractive investment and here are three reasons why you should take a look at the company.
Plenty of cash
RM is a highly profitable company and has plenty of cash, which management is trying to return to investors. Even after today’s gains, RM supports a dividend yield of 2.7% and the payout is covered nearly four times by earnings per share, leaving plenty of room to grow the dividend.
Additionally, the company proposed a special dividend totalling £14.7m, 16p per share, during March of this year and further special payouts could be on the cards.
What’s more, the group is rapidly paying down debt and its pension deficit. Net debt fell to £28.2m at the end of August, from £38.3m as reported at the same point a year ago. During the first half, RM made a £8m contribution into its pension fund.
Low valuation
As RM is chucking out cash and outperforming expectations, you would expect the company to trade at a premium to the wider market. However, this is not the case.
Even after today’s gains, RM is still trading at a forward P/E of 9.1, making it one of the market’s cheapest stocks. Based on the fact that the company is expecting results to come in ahead of expectations for this year, RM could be trading at an even lower valuation.
Right now, the City has earnings per share growth of 6% pencilled in for this year, followed by 2% next year. These forecasts are likely to be revised upwards after today’s news.
Growing margins
The third reason why RM is attractive at current levels, is to do with the company’s widening profit margins.
In particular, RM’s Education Technology division’s costs are running below estimated levels, long-term contracts have seen costs fall significantly but revenue remains unchanged. Moreover, the group’s Education Resources division has continued to attract customers but once again, costs have fallen widening margins.
All in all, not only will falling costs all RM to beat earnings forecasts for this year but the group will become more cash generative. This implies that additional cash returns to investors could be on the cards as RM pays off debt and moves into a net cash position.
The bottom line
So overall, RM has many attractive qualities and it seems as if the company’s growth story is far from over. Still, only you can decide if RM fits in your portfolio, and as usual, I strongly advise that you do some further research before making any trading decision.
