Education software supplier RM (RM.) has turned the corner and looks ripe for a series of forecast upgrades through 2014 that could spark a rerating. Analysts at broker Numis Securities have raised their target price to 165p from 140p thanks to likely operational leverage once the Abingdon-based firm completes the sale of its low-margin PC hardware business.

The £118 million cap has been struggling for several years after the £55 billion Building Schools for the Future (BSF) programme was axed in July 2010. Additional education austerity cuts merely tightened the noose round its neck, but a series of self-help measures, not least a decision to sell its hardware business taken in October, has put the company is a position to return to growth once again.

After the low-margin hardware operation has been disposed of the firm plans to concentrate on developing software, applications and services that schools really need. UK schools are being forced to embrace technology as part of the curriculum, particularly in light of the high level of smartphone and tablet use among pupils. Included in the company’s initiatives here are RM Unify, a cloud-based content distribution system, and RM Books, an ebooks application.

In addition to the growth angle there is also a cash-return element to the RM story and included in this week’s finals (3 Feb) was a proposed 16p per share cash return. Last year RM threw off £34.7 million of cash from operations taking its year-end balance to £63.2 million. Roughly £8 million of that has been earmarked to fund its £15.8 million pension deficit, but with the special payout costing roughly £15 million, RM stands to retain about £40 million of cash on its books. In the absence of sizeable acquisitions a similar special dividend could well be on the cards this year too, and if so, it would bolster an anticipated payout yield from 2.7% to over 15%.

One-off costs from restructuring and the sale of the hardware business are expected to see pre-tax profits fall to around £9.2 million this year to end November, before rebounding to £13.8 million in 2015, according to Numis’ calculations, implying a forward price/earnings multiple of 17, falling to 11.3 in 2015. Current estimates do not, however, factor in a subsequent share consolidation expected to be executed alongside the cash return, which Numis estimates could be worth an extra 10% at least to its current earnings estimates.

We agree that consensus earnings forecasts are too low and there is a rerating story to be had.

SWOT ANALYSIS

STRENGTHS

• Impressive management

• Big cash generation

• Strong school relationships

WEAKNESSES

• Government budgets exposure

• Unpredictable contract patterns

• Mistrust in the market

OPPORTUNITIES

• Improving education investment

• Focus on higher margins

• Tech shift in schools

THREATS

• New application development failure

• Restructuring costs

• Budget constraints could continue