ASX:RUL (RPM Global): Navigating the Shift to Recurring Revenue under Visionary Leadership

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Introduction

RPM Global is in a business to solve challenges faced by mining companies with its software products as well as advisory services.

Software Division

The Software Division at RPM Global offers tailored software solutions that significantly enhance the efficiency of mining operations. It focuses on merging strategic planning with real-time operational capabilities, enabling mining enterprises to refine their processes, bolster efficiency, and amplify profitability.

RPM has more than a dozen software ( organically built and acquired). Out of all its software, AMT - Asset Management and XECUT - Shift & Short-term Scheduling are two “go-to” mining operation software products.

Software division is why it is becoming high quality SaaS company serving a specific industry.

In 2017, RPM Global embarked on a strategic shift, moving from the traditional model of selling perpetual software licenses to adopting a subscription-based licensing model. This transition was underpinned by the recognition that the recurring revenue from subscriptions is far more valuable over the long term than the one-off, short-term income from perpetual licenses. Subscription licenses, offering predictability and stability, were understood to be a more sustainable revenue source, despite initially impacting the company's year-on-year financials.

Perpetual licenses, while providing immediate revenue recognition, carry limitations due to their non-recurring nature, leading to fluctuations in the company's reported revenue, profitability, and cash flows. Conversely, subscription licenses are accounted for over the committed term of the subscription, enhancing the predictability of financial outcomes. The longer the subscription term, the more beneficial it is perceived in terms of financial stability.

This deliberate shift illustrates RPM Global’s adaptability and commitment to a sustainable business model, designed to deliver long-term value to its stakeholders.

Advisory Division

RPM Global's Advisory Division offers a broad range of expertise that benefits miners, investors, and other stakeholders:

• Energy Transition: They guide companies to understand and meet the growing demand for essential minerals, helping them move towards eco-friendly practices.

• Mining Project Services: RPM Global advises on mining projects from start to finish, aiming to improve every stage for better results and increased value.

• Investor Services: They assist in navigating financial complexities, reducing risks, and achieving favorable investment conditions.

• Operational Services: Leveraging data, the division helps mining operations reach their highest efficiency and performance levels.

• ESG Services: RPM Global integrates sustainability into mining operations, focusing on environmental, social, and governance factors to promote responsible mining practices.

In simple terms, RPM Global’s Advisory Division provides valuable insights and practical solutions to the mining industry, ensuring sustainable and profitable operations.

RPM Global combines the strengths of its Software and Advisory Divisions to offer a complete solution where advanced technology pairs with expert advice. This approach helps their clients not just keep up, but be leaders in the mining industry

Market Opportunity in Mining Software

It's clear that RPM Global operates within a niche market, providing specialized software and advisory services tailored to the mining industry. Understanding the potential market size and growth trajectory is crucial for assessing RPM Global's future growth prospects.

Historically, the mining sector has been slow to adopt cloud and SaaS solutions, potentially due to a hesitancy towards change or logistical challenges such as the availability of network infrastructure. However, recent trends suggest a shift is underway. Improvements in network coverage and the emergence of Edge Data Centers in proximity to mining operations are mitigating previous barriers. Furthermore, the mining industry's inherent need for efficiency and profitability makes it an ideal candidate for the streamlined processes that SaaS software can offer.

Given the industry's increasing requirement for technological solutions that enhance productivity, it's logical to project an increase in the adoption rate of SaaS offerings in mining. This is supported by the data from a market report, which forecasts significant growth for the mining software market. It is anticipated to expand from $10.1 billion in 2023 to $14.9 billion by 2028, at a CAGR of 8.1%. (Market-Reports/mining-software-market) This growth is driven by following key factors:

• Efficiency is Key: Mining companies want to cut costs, streamline operations, and boost production, leading to high demand for software that makes this possible.

• Safety First: Regulations and the need to protect workers mean real-time monitoring and safety management software are in demand.

• The Future Is Tech: Smart mines that use automation, AI, and other cutting-edge tech are the goal. This creates huge opportunities for the right software.

Challenges and Big Opportunities

• Making It Fit: Connecting new software with old systems can be a hurdle, especially for smaller mining companies. Solutions that are easy to integrate will have an advantage.

• Predict and Prevent: Software that can predict equipment failures before they happen will be a game-changer. This can save mining companies money and improve safety.

The Bottom Line

The mining industry needs innovative software solutions to be more efficient, safe, and sustainable. This translates into a massive opportunity for companies that can deliver the right tools.

RPM Management

Richard Mathews, recognized for his leadership at Mincom as the CEO of Australia's largest enterprise software provider to the mining industry, joined the board of RPM Global in February 2012. He used that time to gain insight into the RPM's operational activities, market positioning, and its trajectory for growth. Demonstrating his confidence in RPM's potential and aligning his interests with those of the company, Mathews invested his own capital to acquire an on-market equity stake of approximately 5%. This move not only underscored his belief in the company's future but also cemented his commitment to its success. He was appointed as the CEO on August 28, 2012, marking the beginning of a new chapter in the company’s leadership.

He still owns a significant chunk of shares and is instrumental in making RPM into high-quality software business.

RPMGlobal current Chairnman Stephen joined RPMGlobal's board in July 2020 and became the Chairman in March 2021. With a background in accounting at Price Waterhouse and experience in funds management, Stephen has been active in managing investments for one of Australia's large super funds. Adding to his commitment to RPMGlobal, he owns 3.2 million shares in the company.

Ross Walker has been on the RPMGlobal board since 2007, his expertise spans corporate finance, auditing, and M&A for over 20 years. He holds a Bachelor of Commerce and is a Fellow Chartered Accountant. Committed to RPMGlobal, Ross holds 1.2 million shares in the company.

The current ( June 2023) holdings of the Board of Directors at RPM Global Holdings Limited are as follows:

• S Baldwin holds approximately 1.45% of the company.

• R Mathews holds approximately 3.65% of the company.

• A Jenkins holds approximately 0.01% of the company.

• P Scurrah holds approximately 0.01% of the company.

• R Walker holds approximately 0.53% of the company.

In total, the Board of Directors holds approximately 12,744,866 shares, which is about 5.66% of the total shares issued, There are roughly 225 million shares outstanding

RPM Financial performance

RPM Global Total Revenue trend can be seen from the following graph.

Now within total revenue, if we remove Advisory and plot software division revenue graph it looks something like below

From above graphs it seems that Revenue & software revenue hasn’t gone anywhere from 2017 to 2021 but the underlying business was transforming from perpetual license sales to License subscriptions, which can be seen from the graph below

Now if you look at the Advisory division from 2016 to 2023 following graph shows the trend.

Although, Just seeing a trend from the graph can be misleading as RPM Global's Advisory division has seen some transformation. Initially, RPM had substantial coal-related revenue streams, leading to the acquisition of GeoGAS in 2007. However, as the relevance of coal diminished in 2020s, it became peripheral to RPM's strategic focus on sustainability. In alignment with its commitment to environmentally conscious operations, RPM divested GeoGAS. Simultaneously, RPM expanded its portfolio by acquiring a specialized ESG advisory firm, responding proactively to the surging need for ESG expertise in the mining industry. This shift left around 3 to 4m hole in their Advisory revenue business but it enhanced RPM Global's sustainability profile and increased its appeal to ESG-oriented investors.

Going into 2024, RPM’s Software and Advisory divisions are performing well and have momentum. Although revenue from the Advisory division can be lumpy, it seems to have a lot of demand based on management’s commentary.

Valuation

RPM Global has confirmed its financial outlook for FY2024, The company expects:

• Total Revenue to range between $110 million and $115 million, a notable increase from $98.4 million in FY2023.

• EBITDA to be between $21.5 million and $23.5 million, up from $12 million in the previous year.

• Profit Before Tax to fall between $16.5 million and $18.0 million, compared to $4.8 million in FY2023.

It is important to remember that management incentives are typically not factored into these projections unless they are deemed likely to be realized, often occurring in the latter half of the fiscal year

At the current share price of $2.20, RPM Global’s market capitalization stands at approximately $500 million. This valuation translates to a forward price-to-earnings (P/E) ratio of 30, based on the anticipated net profit after tax (NPAT) of $17 million for FY2024. While a forward P/E of 30 may appear demanding, it's crucial to delve deeper into the company's growth dynamics.

RPM Global is poised at a strategic inflection point, with its Software division demonstrating a solid track record of revenue growth. If this trajectory continues, alongside a sustained performance in the Advisory division, the company’s operation leverage is set to significantly enhance its profitability. The implication of this leverage is a substantial and rapid contraction of the forward P/E ratio, making the current market valuation an attractive entry point for investors.