During the week mining software company RPMGlobal (ASX: RUL) released its FY 2024 results. Total revenue was up 15% to $113.3 million, net profit before tax was up 71% to $10.2 million, and net profit after tax was up a whopping 135% to $8.65 million.
Due to having over $40m of tax losses, the company pays low and varying tax rates (14.8% in FY 2024), and RPM Global Richard Mathews CEO said on the call that it was probably 3 or 4 years away from generating franking credits (that is, paying tax in Australia). Therefore, given the variability of the tax rate, I prefer to look at profit before tax as a gauge of business growth. You can see below that the second-half profit before tax was weaker in FY 2024. That is because the H1 FY 2024 RPM Global results benefited from a one-off contract termination payment worth just over $3m, and the second half did not.
As you can see below, revenue was stronger in the second half, as was the key subscription software revenue I like to track.
The biggest change in this set of results was that the company has dropped the nonsense “net profit before tax excluding management incentives” metric. However, the RPM Global CEO Richard Mathews was keen to point out he did not agree with any of the criticism of the metric, arguing on the conference call. If my hearing is correct, he said:
“My position hasn’t actually changed. So when I talk to them [analysts] individually, you’ll see that my position hasn’t changed on it. It’s one of those things we don’t know until we near the end of the year, where those have been earned or not. Then generally, they get them all or none. So we put them into the guidance this year. So I don’t spend so much time talking about it when I talk to all the investors. So why not going out, I explain why I hadn’t put it in, so I’ve spent a lot of time talking about that. So now it’s in there. So I saw everyone is happy about that. Who knows, maybe it’s a nice little positive at the end of the year, who knows.”
As a shareholder I certainly appreciate the fact that the board of directors has had the gumption to spit out that particular sandwich, because the day management manage to anchor the board on “profit before management incentives” is the day the market gives them carte blanche to ramp management incentives to the moon. It is nice to know that the whiff has been removed, and we can only hope it stays that way.
The main negative from the call was when the CEO said there were “keyboard warriors out there” who were “looking at the company’s market cap as a percentage of profit. I think they’re missing the whole point, right? There’s really been an important metric for us, certainly for ourselves for myself and for the quarter is that software license backlog, the $161 million.”
This is a negative in my mind because obviously I care about profits. Also if the product is as sticky as they say it is, then ARR is the more important metric. Management can expand TCV by convincing a client to sign up for 10 years instead of 5 years. However, that might make it more difficult to raise prices in the interim. Furthermore, since management are remunerated on TCV, high TCV growth and low ARR growth means more remuneration for profit created. The best case for shareholders would be to have high ARR growth, even if the TCV growth is flatlined or moderated.
In my opinion board should change the remuneration structure so that it is about ARR or profit more than TCV.
Rounding out the financials, free cash flow was a very pleasing $11.6m, more than the profit before tax. The company still. had over $34m cash after spending almost $13m buying back shares in the last year.
On the earnings call, RPM Global CEO said, “when you think of us from a capital management strategy, it’s pretty simple, make money buy shares. So it doesn’t get much more simpler than that.”
This is exactly the kind of language that 100% of market participants understand and like to hear.
I asked Mathews on the call as to why he bothers to give guidance at all, and he said he had considered it but, “we’ve given it in the past, so I think we will give it again.” While it is true the market hates to see the withdrawal of guidance, it only goes to show, in my opinion, why a company should never give guidance. The risk, now, of course, is that every guidance miss damages the credibility of management. This is a pity, because what we actually need management to do is “make money buy shares.”
The irony is that when the share price falls on a guidance miss, RPM Global can buy shares in itself for a lower price, creating more value for those shareholders who are willing to take on the rollercoaster.
In the end, the company said it believes that in FY 2025 “total revenue will be in the range of $120 million to $125 million (FY24: $113.3 million), operating EBITDA will be in the range of $17.5 million to $19.5 million (FY24: $15.3 million) and profit Before Tax will be in the range of $12.5 million to $14.5 million (FY24: $10.2 million).
To take a conservative view of value, we could pretend RPMG Global earned the low end of guidance and had to pay 30% tax (it doesn’t). In that case, net profit after tax would be $8.75m. At the share price of $2.66 it has a market capitalisation of about $587m, so it’s on a conservative (normalised for tax) forward P/E ratio of 67. Given the company’s ability to grow profits organically at fast rates, I think this is still a reasonably attractive price if you take a long-term point of view. The ultimate pot of gold at the end of the rainbow would be if the company grows profits and market capitalisation sufficiently to enter the ASX 200. That could be many years away but leaves plenty of room for upside given the firehose of superannuation “growth fund” money pointed at a fairly slim constituency of profitable growing software companies.
When I published my first ever buy recommendation for RPM Global on “tax loss selling day” (June 30) back in 2016, I wrote, “the continued leadership of CEO and Managing Director Richard Mathews is an essential part of our thesis for investing in RPM,” and that remains the case to this day.
RPM Global remains a Buy in my book.
Disclosure: the author owns shares in RUL and will not trade RUL shares for 2 days following this article. This article is not intended to form the basis of an investment decision. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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