Promethean World PLC Surges 25% On $130m Bid Proposal: Should You Sell And Buy RM plc?

Promethean World PLC (LON:PRW) has surged following a takeover proposal. Roland Head asks if shareholders should sell and switch to education peer RM plc (LON:RM)?

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Today’s biggest riser is educational technology supplier Promethean World (LSE: PRW), which rose by 25% to 34p this morning after the company said it was discussing a bid proposal valued at 40p per share.

Promethean put out a statement after the stock market closed last night revealing that Hong Kong-listed firm NetDragon Websoft Inc. had approached the firm with a cash offer of $130m. This equates to 40p per Promethean share.

Both companies have emphasised that the offer is still at an early stage and that discussions and due diligence are ongoing. There is no certainty that NetDragon will make an offer for Promethean.

Nevertheless, this will probably come as welcome news for Promethean’s long-suffering shareholders. The firm’s shares have fallen by 82% over the last five years and Promethean has reported a loss for the last three years.

Is it time to sell?

Promethean’s problems started in 2012, when it reported a sharp fall in US sales. At the time, the US accounted for about half of the firm’s business. Three years later, Promethean doesn’t seem to have recovered.

Last year’s sales of £118.2m were 47% lower than in 2011, and the firm reported its third, consecutive annual loss in 2014. The latest broker forecasts show that further losses are expected in 2015 and 2016.

Promethean does have a new teaching software system which is expected to begin generating recurring revenues in 2015. However, this will only account for a small proportion of revenues and will require further investment. This is expected to push Promethean from net cash into net debt during 2015.

In my view, Promethean is a sell following this bid proposal. The only question is whether to wait to see if the proposal becomes a formal offer. Promethean shares are currently trading at about 34p, a 15% discount to NetDragon’s proposal.

A formal offer should move the share price closer to 40p, but if the proposal doesn’t succeed, the share price is likely to fall.

Personally, I’d be tempted to sell today, but it’s an individual decision. There’s no way of knowing whether the proposal is likely to succeed or not.

An education alternative

If you do decide to sell, you may want to reinvest the proceeds in another company offering exposure to the education market. One possibility is RM (LSE: RM).

Like Promethean, RM was hit by spending cut backs in 2011 and 2012, but unlike Promethean, RM’s business appears to have recovered.

Operating profits rose by 58% to £16.5m last year, while earnings per share rose by 25% to 13.3p, putting the shares on a trailing P/E ratio of 11.2.

Full-year forecasts for 2015 suggest that earnings per share could rise by 11% to 14.8p, giving RM a 2015 forecast P/E of just 10.

RM has net cash of £47m and positive cash flow, and the firm’s shares also offer a prospective dividend yield of 3.2% for the current year.

In my view, RM looks a reasonably good buy at today’s prices and is likely to continue to outperform its smaller rival Promethean.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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