Company Overview: RPMGlobal Holdings Limited (ASX: RUL) is a mining-based technology company, which is engaged in mining software, technical consulting, mining advisory services, and training in the area which includes scheduling, simulation, and financial analysis solutions. The company has been trusted by mining companies of all sizes and commodities to support their growth. The company has an experience of more than 50 years and operates in 125 countries across the globe, with ~22 offices worldwide.

RUL Details

Diversified Client Base and Strength in Advisory Business Aid RUL: RPMGlobal Holdings Limited (ASX: RUL) is a mining technology company providing mining software, mining advisory services, technical consulting, and training in the area of mine planning. The company has achieved global expertise over the past 50 years through its work in more than 125 countries. In 2019, the company remained focused to implement its strategy of developing and offering top class technology know-how for the mining industry. 

The company also remained focused on the value and strength of its Advisory and GeoGAS businesses, with both continuing to perform strongly. Revenue from the company’s Advisory division soared year over year in FY19. Coming to the GeoGAS division, the company saw a strong year with an increased contribution, resulting from a number of coal gas tests for exploration, which reduced 19% on pcp. The Software division also had a robust year in terms of new customer’s acquiring RPM software products for the first time. The scope and intensity of the company’s software offering, along with the innovative nature of its solutions, stemmed in 15 new customers using its software subscription for the first time during FY19. The company opines that the ongoing strategy will deliver great benefits to both its customers and shareholders.

Total revenue for FY19 increased by 8.7% and came in at $80.1 million. The year marked the company’s initiatives to offer a subscription licensing alternative to its customers for the first time. During the year, the company sold $10.3 million in total subscription revenue as compared to $1.7 million witnessed in 2018. This substantial increase in subscription licensing positively impacted the company’s perpetual license sales which decreased slightly to $12.1 million from last year’s number of $13.6 million. Given the total subscription revenue sold during the year, the company reported EBITDA of $5.9 million in 2019, up from $4.4 million reported in 2018. Total software revenue in 2019 stood at $48.8 million, up 9.2% year over year.

During the period, the company also completed two six-year enhanced the next evolution of software development programmes. The resultant launch of XERAS Enterprise 3.0 (XE3) and the second instalment of XPAC Solutions Underground Coal Solution marks are not only built upon the company’s strong foundations but also enable RPM to kick start 2020 financial year with a positive note.  

Going forward, the company is expecting great opportunities from XECUTE, the company’s ultra-short-term scheduling product. It expects to add 7 new customers acquiring licenses in 2020. The company also remains enthusiastic about its software products and expect to see strong growth across all of the product suites in 2020. The company expects acceleration in software subscription licensing and is confident about the performance of mobile equipment simulation products. 

Technological upgrade in mining processes has been keeping industry players busy with innovation. Such proposals assist in tapping demand from existing and new customers but can make the players more leveraged. Diversification is usually considered a boon. RPM has a highly diversified client base, a significant geographic footprint, and an extensive array of value-added products, which are aiding the company to tap future growth opportunities.

Diversified Client Base (Source: Company Reports)

1HFY20 Key Financial Highlights: During 1H20, gross revenue of the company witnessed an increase of 13% year over year and stood at $41.1 million. Whereas, net revenue increased by 9%. In the same time span, operating EBITDA of the company was $4.3 million, which skyrocketed 975% from the year ago quarter’s figure of $0.4 million. NPAT for the period stood at $0.5 million as compared to a net loss of $1.7 million reported in the year-ago period. The Advisory and consulting division’s net revenue increased 21% from the prior corresponding period, with the division’s financial contribution increasing to $2.1m as compared to $0.6m reported in 1HFY19.  Net revenues from the Software division went up 4% year over year with perpetual license sales falling 48%, subscription revenue rising 388% and both support revenue and consulting revenue remaining steady. Annual Recurring Revenue (ARR) from software subscriptions at the end of the period stood at$10.7 million, up from $4.3 million as at 30 June 2019. During the period research and development expenditure declined 9% year over year and stood at $5.8 million.

1HFY20 Key Financial Highlights (Source: Company Reports)

Balance Sheet and Cash Flow Details: As on 31 December 2019, the company had a cash balance of $24.6 million with no debt. Total equity at the end of the period came in at $61.3 million as compared to $58.7 million as at 30 June 2020. During the period, cash outflow from operations stood at $0.7 million. Notably, the company has paid $1.9 million in earnout payments in 1HFY20.

Balance Sheet Details (Source: Company Reports)

Update on Software Subscription TCV and ARR: On 2 July 2020, the company informed the market about the Total Contracted Value (TCV), which stemmed from the sale of software subscriptions and revenue from perpetual license contracts completed during FY20. The company expects to finish FY20 with software subscription TCV of $34.5 million. As at 2 July 2020, the company’s Annual Recurring Revenue (ARR) from software subscriptions was $12.7 million per annum. Subject to market condition, the company expects to release its FY2020 full-year results in late August 2020.

Recent News: On 31 July 2020, the company announced that it has completed the acquisition of 100% of the issued share capital of Revolution Mining Software for consideration of CAD$500,000.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 46.88% of the total shareholding. Perennial Value Management Ltd. holds the maximum number of shares with a percentage holding of 8.17%, followed by First Sentier Investors with a holding of 7.98%.

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In 1HFY20, the company reported a gross margin of 88.9%, higher than the industry median of 84.2%. In 1HFY20, the company reported an EBITDA margin of 10.5%, higher than Dec’18 margin of 2.6%. ROE in 1HFY20 stood at 0.7%, as compared to Dec’18 negative ROE of 2.7%. Debt levels for 1HFY20 also stood at decent levels, with a debt-to-equity multiple of 0.08x. Current ratio of the company stood at 1.92x in 1HFY20, higher than the industry median of 1.82x. The company is confident about business growth, looking at the potential impact on gross margin from its key products.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Risk Analysis: The company’s financial instruments comprise mainly of receivables, payables, bank loans and overdrafts, finance leases, loans from related parties, cash, and short-term deposits. The main risks RUL is exposed to through its financial instruments are foreign currency risk, interest rate risk, liquidity risk and credit risk. On the flip side, the company is exposed to shorter-term disruptions from challenging macro-economic environment due to COVID-19 led outbreak. The company also faces stiff competition from peers.

Outlook: Going forward, the company stands to gain from record achievement and growing revenue in the last few years. Moreover, continued expansion and investment in R&D and consistent product upgradation are likely to be continued in FY20. The company’s strategies to move towards software subscription licensing is likely to accelerate, thereby giving it a competitive advantage over its peers as well as helping the company to pursue new opportunities. Higher adoption of mining companies to implement enterprise software products of RUL plays an important role and aids the company to come up stronger in 2020. The company remains confident regarding its mobile equipment simulation products (HAULSIM/SIMULATE) which are likely to become the defacto standard for the industry in FY20. Given the positive response from mining companies, the company opines that its new software offerings will eventually substitute the common obsolete methods of the past.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative) 

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM-Next Twelve Months 

Stock Recommendation: The stock of the company went up 13.53% on a year-to-date basis but went down 3.02% in the last one-month period. Currently, the stock is trading slightly below the average of its 52-week trading range of $0.525 - $1.25. The company remains on track to invest in research & development. With the above developments in place, the company expects to maintain its historical revenue growth trajectory and deliver shareholders’ value in the long run. We have valued the stock using an EV/Sales multiple based illustrative relative valuation method and arrived at a target price, offering an upside of lower double-digit (in percentage terms). For the purpose, we have taken the peer group - Infomedia Ltd (ASX: IFM), Reckon Ltd (ASX: RKN), and Limeade Inc (ASX: LME), all falling under the software space. Considering the key business developments, anticipated growth in the software business and valuation, we give a “Buy” recommendation on the stock at the current market price of $1.000, up 3.627% on 7 August 2020.

RUL Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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