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Stock Doctor’s commentary and golden rules

Daniel Ortisi of Stock Doctor gives us a detailed pre-market commentary on the results of popular small cap RPMGlobal Holdings Ltd (ASX: RUL). Is RUL share price a buy today?

Mining advisory and software business RPM Global announced its 1H24 result which appears in line with management’s updated FY24 guidance.

As RUL is passing the inflection point between loss making and profitability, we can see large variations in its bottom-line result. For example, net profits grew over 400% year on year, but this was impacted by the recognition of a $3.1m royalty sale booked as a profit and carried forward tax losses resulting in no tax paid (inflating profits).

We prefer to focus on the improving metrics in software revenues, customer growth and improvement in total contract value (TCV) as the key metrics to follow in the near term, rather than profits which could be highly variable.

Source: Company filings

Financial health – Golden rule 1

RUL’s cash balance fell $12m to $23m half on half due to the seasonality of cash receipts (mainly 2H weighted) and the ongoing share buyback program ($8m spent).

Despite a cash outflow and reducing cash balance, we are not concerned as this is symbolic of seasonality and growth, not a loss-making operation.

As the business expenses its research and development costs, there isn’t a significant intangible asset position on the balance sheet (other than acquired goodwill).

Past financial performance – Golden rule 2

Revenue grew 21% year on year (yoy) to $56m, consisting of $39m in higher-margin software revenue and $18m in advisory-based revenue.

Importantly, software subscription revenue improved 26% to $21m as the TCV pipeline continues to enlarge and contracts signed in prior years roll on. Underlying profits improved 89% to $10m which displays the operating leverage within the business, however as mentioned above, this was impacted by certain one-off benefits.

We anticipate improving earnings efficiency metrics (ROE and NPM) however, given the relative size of the profit base, we anticipate volatility to be present in these metrics in the medium term.

Outlook and active risks – Golden rule 3

Guidance remains in line at $110-115m in revenue (FY23: 98m) and $21-24m in underlying earnings (FY23: $12m).

TCV has grown to $141m (1H23: $115m) which is a key indicator to us that the customer base is growing, and future revenue growth will be sustained.

Churn rates remain low and steady at 3% and management flagged a strong take up in its product suite outside of asset maintenance (AMT), which was somewhat unexpected and would like to see more colour on this at the analyst call.

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