DM2 May 2012 22:03
Buy: RM Education (RM.)
"This company supplies information technology to schools in all its forms - hardware, software and networks. It is by far the largest supplier of these types of products in the UK and it has very good contacts at the individual school level. A lot of its competitors go through the Building Schools for the Future programme instead.
"RM has been through a tough time recently because of the cuts the government is making to the education budget; 80% of a school's costs are staff and if the choice is between getting rid of teachers and shrinking the IT spend, most will opt for the latter.
"As a result, RM's shares have slipped significantly. Yet, it is this recent weakness that has become the opportunity.
"Initially the company was slow to react to the new environment, but major changes were made to the board last year. This is one of the things I look out for - management change can make a significant difference.
"In this case, Martyn Ratcliffe came on board as executive chairman. He used to run Dell Europe, and has a reputation for creating value.
"Ratcliffe refocused RM on its UK schools franchise. The company had bought businesses in America and Asia.
"He exited all that. He believes that the group is in the business of distribution to schools rather than specifically technology. He is therefore also looking at distributing, for example, insurance or energy.
"As more schools convert to academies, it takes them out of local authority control and plays to RM's strengths. We believe that they should be able to gain market share, and share price performance will pick up."
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