Divesting Advisory Business Will Strengthen Software Focus And Streamline Operations

Key Takeaways

• Transition to subscription models and successful market expansion are enhancing stability, increasing revenue predictability, and suggesting strong future growth.
  
• Divestment and product innovation improve operational efficiency, boost competitive position, and promise enhanced shareholder value through capital returns and cost reductions.
  
• The sale of the Advisory business could harm profitability, introduce execution risks, reduce synergies, and create uncertainties affecting investor confidence and revenue projections.

Catalysts

Develops and provides mining software solutions in Australia, Asia, the Americas, Africa, and Europe.

• The divestment of the Advisory business allows RPMGlobal Holdings to focus solely on its Software division, which could improve revenue due to heightened investor interest and the ability to streamline operations and increase recurring revenue opportunities.
  
• Transitioning from perpetual software licenses to subscription models is showing significant growth, with a 64% increase in software sales, which is likely to positively impact both revenue and earnings by adding more stability and predictability to the cash flows.
  
• Significant increase in software sales from the American market, alongside 4 new Global Framework Agreements, indicates expanding market share and penetration, suggesting a strong future revenue trajectory.
  
• The introduction and ongoing trials of new innovative products, such as the mine design product and FleetOptimiser, if successful, are likely to add to revenue streams and strengthen RPMGlobal’s competitive position in the mining software market.
  
• Expected cost reductions following the divestment of the Advisory business and a commitment to return proceeds to shareholders as a capital return, which could positively impact net margins and enhance shareholder value through improved financial efficiency and increased shareholder returns.

RPMGlobal Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming RPMGlobal Holdings's revenue will decrease by 6.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.2% today to 11.5% in 3 years time.
• Analysts expect earnings to reach A$9.8 million (and earnings per share of A$0.07) by about March 2028, up from A$6.5 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 88.7x on those 2028 earnings, down from 90.3x today. This future PE is greater than the current PE for the AU Software industry at 58.6x.
• Analysts expect the number of shares outstanding to decline by 0.79% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.38%, as per the Simply Wall St company report.

RPMGlobal Holdings Future Earnings Per Share Growth

Risks

• The sale of the Advisory business, despite being at a favorable price, represents a significant portion of the company's profit contribution, which might negatively impact overall earnings and profit margins as investors adjust to the change in business structure.
  
• The reliance on a complex global carve-out process for the Advisory business sale introduces execution risk, which could lead to unexpected costs or delays, potentially impacting net margins and timing of earnings.
  
• The divestment may reduce synergies previously enjoyed between the Advisory and Software divisions, potentially affecting the software sales funnel and future revenue streams if the synergy was significant in driving new software ideas.
  
• The decision to abstain from updating financial guidance due to numerous uncertainties post-divestment might signal potential instability or unexpected financial impact in the near term, affecting investor confidence and earnings predictability.
  
• The future success of large software pilot projects is uncertain, and a failure to convert these pilots into revenue-generating contracts could negatively affect revenue projections and growth, impacting earnings expectations.

Valuation

• The analysts have a consensus price target of A$3.26 for RPMGlobal Holdings based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$85.6 million, earnings will come to A$9.8 million, and it would be trading on a PE ratio of 88.7x, assuming you use a discount rate of 7.4%.
• Given the current share price of A$2.66, the analyst price target of A$3.26 is 18.4% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.