Time to harvest! Juicy earnings growth, a share buyback and a proven CEO

This small cap CEO consistently makes shareholders money. We think he will keep delivering.

2 HOURS AGO

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Ben Rundle

Hayborough Investment Partners

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We have followed RPM Global (ASX: RUL) for a number of years now and we have owned it in the fund since May 2023 when a liquidity event allowed us to take a meaningful position at an attractive price.

What initially piqued our interest was that the CEO Richard Mathews had a fantastic track record of consistently making his shareholders money. He was the CEO of Mincom from 2005-2007 and delivered shareholders a 3-year compound annual return of 52%. He then became the CEO of ASX listed eServGlobal in 2009 and bought almost $6m worth of stock on market, before selling their US business to Oracle one year later, generating shareholders a 97% return in one year.

He has been the CEO of RPM Global since 2012. Again, he put his money where his mouth was and bought over 6 million shares on the open market when he joined. By backing him a third time, shareholders have so far generated a compound annual return of over 15%. These kinds of people are rare in the listed equity world.

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Some background

RUL is a global mining software, advisory and consulting business. The company has been around for 50 years, having acquired significant domain knowledge in that time and has been listed on the ASX since 2008. RUL’s software is an end-to-end solution spanning mine design, planning, simulation, operations, optimisation, ESG, finance and asset management. Their clients are mainly tier 1 & tier 2 miners. They work in partnership with their clients, providing advisory alongside the software, to drive great outcomes and long-term relationships.

In 2013, they had 10 desktop products, they have since spent over $120m on their tech and now have 40 software products. Importantly, this software spend has all been expensed through the profit and loss which is rare in the land of listed tech and is a much more conservative accounting approach than most of its peers take.

The Earnings Result

The first half result for RUL is usually a tough one, as their earnings growth is typically weighted towards the second half. The share price had a strong rally going into the result, which would normally require an earnings upgrade to justify. Whilst we didn’t get the earnings upgrade, the company noted that their sales pipeline had replenished strongly post a large selling period in June last year. They are also a conservative management team, so this is not something that worries us. Overall, we are happy with the result.

Why we like it

The reason we think RUL looks attractive is because the business has transitioned its revenue model from lumpy one-off licence sales to software as a service and are now at the point of high operating leverage. This transition is not easy, with earnings taking a hit whilst the transition happens, which weighs on the share price. This can be best illustrated using the “fish” model in figure 1 below.

The Fish Model

RUL are now at the end of this transformation which will see the “harvesting” phase of their investment program. With that comes strong earnings growth, as evidenced in this result, with those earnings growing much faster than the revenue.

On top of the juicy earnings growth, the company has also been buying back a large amount of their own stock which helps to drive earnings per share higher. To date, the company has bought back over 11m shares which represents close to 5% of the company, at prices much lower than the current share price. The company still has net cash on the balance sheet of $28.5m which gives them ample capacity to continue with the buyback.

Finally, we always like to find out what such a business might be worth in the hands of an industry player and there has been a big increase in M&A across the industry in the last few years. In 2021, Epiroc bought MineRP for 4.5x revenue. In 2022, Sandvik bought RUL’s close peer Deswik for an EBITDA multiple of 28-32x.

We think RUL will keep delivering for shareholders with strong earnings growth and one day might find itself in the crosshairs of a suitor. If this eventuated, we would be fairly keen to keep a close eye on what Richard does next.