Five stocks to watch in May

Published by Richard Beddard on 30 April 2013.
Last updated on 30 April 2013



In 2011, software firm RM came to terms with the reality of declining education budgets by shedding unprofitable businesses, making redundancies and reorganising three divisions into four. All of the senior management positions have changed and, having stabilised the business, Martyn Ratcliffe, appointed in 2011 as executive chairman, has departed.

Although the figures show a decline in revenues in 2012, RM changed its year-end in 2011 and the previous "year" amounted to 14 months. Ignoring the businesses it shed and adjusting for the longer period, RM says revenue was flat. Profit improved.

The shares could be good value on an earnings yield of 9% but the company is candid about challenges it faces.

Education Technology, RM's original and biggest business, supplies computer hardware to UK schools, as well as networks and internet services. RM's strong position gives it a platform from which to sell classroom resources, software and managed services.

Managed services is the installation and management of IT that is often under contracts awarded as part of the defunct Building Schools for the Future (BSF) programme. BSF revenues peaked this year and are expected to peter out after 2014.

RM is also worrying about the adoption of "bring your own device" policies by schools, which are not yet mainstream but offer the possibility of reducing IT costs.

And although revenue from electronic marking and testing grew slightly last year, RM's other software products and services are threatened as schools abandon expensive online learning platforms.

RM's response is still in its infancy. It has launched RM Unify, a platform for distributing software and content to schools. Unify will allow a more pick-and-mix approach than traditional learning platforms and include RM Books, which anticipates the adoption of ebooks.


This research and development consultancy works with medical and commercial customers, big names like Vodafone and Unilever, as well as start-ups, to research opportunities, design new products and develop them into something that can be manufactured, for a fee.

Its business model changed in 2007. Previously Sagentia was a hybrid venture consultancy, developing its own intellectual property and spinning off businesses, often unsuccessfully.

The company wrote off many of the spin-offs and introduced cost control, project management and account management into the consultancy.

Traditionally it charged fixed fees, taking on many of the risks of projects. Now 90% of fees are charged on a time and materials basis. Sagentia used to work from project to project, now it says it operates in long-term partnership.

Its website, replete with case studies, articles, and white papers, is a demonstration of Sagentia's increased commitment to marketing and reveals a surprisingly wide research portfolio. It developed the M-Pesa mobile payment technology, advanced medical devices and water meters, for example.


Now Sagentia is comfortably profitable, although sales and profits dipped slightly in 2012 due to the cancellation of a major medical project. It has a strong balance sheet, which it plans to use for acquisitions as well as investment.

The shares are good value on an earnings yield of 13% if Sagentia can remain this profitable. That is in the hands of Martyn Ratcliffe, ex-RM, who bought a large stake in 2010 and took over as executive chairman in 2012.

There are risks: Sagentia is dependent on five clients for 46% of revenue, and there are competing consultancies, but Sagentia says the quality of its service means it can charge a premium and if that remains true, the fee-based approach offers a low risk and reasonably rewarding method of investing in the future.


Having had a hand in turnarounds at RM and Sagentia, Ratcliffe has also been involved in the rehabilitation of Microgen, which develops and markets enterprise software.

In the mid-2000s Microgen was a diversified software house and consultancy but it chose to focus on two businesses, one selling software to wealth management companies, and another selling bespoke applications and consultancy based on its newly developed Aptitude platform and software products, such as Accounting Hub, derived from it.

Aptitude's major selling point is performance, measured in billions of transactions per hour in memory, and is required to manage the high volumes of data used in financial services and digital media, which are Aptitude's main markets.

By December 2012, Aptitude's share of revenues had grown to 50% of Microgen's, but it's not as profitable as the more mature software comprising the other 50% of the business. Or at least, it doesn't look as profitable.


The company expenses all development costs, a conservative accounting approach that understates profit and its balance sheet value. It could, as do many companies, amortise the software development costs over many years, recognising its investment on the balance sheet and boosting profit in the short term, but it doesn't. If it's earning more profit than it's reporting, then it's probably good value on an earnings yield of 10%.

The presence of Ratcliffe, who has been chairman since 1998 and owns 6.5% of the shares, is also reassuring. Microgen's management has generated value in developing patented intellectual property, in simplifying the business, and in returning cash to shareholders.

The recent histories of RM, Sagentia, and finally Microgen, form a large part of Ratcliffe's CV. Prior to Microgen he was a vice president at Dell and his experience at the nexus of business and technology should serve investors well.


Contract electronics manufacturer Stadium has just reported its worst results in recent times.

The business mostly manufactures and assembles displays, panels, touch screens and printed circuit boards, for equipment used in industry, fire control panels for example.

It has acquired a number of power supply manufacturers over the past decade, and bought IGT, a manufacturer of display and touchpad subsystems, in 2012.

These two "defensible niches" and others yet to be acquired are the focus of its growth strategy: to acquire closely related technologies it can manufacture and cross-sell.

The new chief executive and finance director both come from FTSE 100 engineer Smiths, and the new chief operating officer is from Laird, a FTSE 250 electronics firm. Maybe they can turn the company around.

By reducing excess capacity, closing a factory in Rugby and selling off a property in Hong Kong, they show a commitment to profitability even if it isn't

apparent in the latest results, and the company says it's reviewing operations and business processes, although it's at "the beginning of a journey".

Although the journey is worth following, Stadium is in a competitive business and it remains to be seen whether it can develop its niches and become sufficiently profitable through a full business cycle.


Kitchen supplier Howden Joinery has enjoyed a spectacular turnaround since 2005 when retailer MFI appointed the head of its trade division chief executive.

Then the loss-making company was vulnerable to debt, pension liabilities, and leases it no longer planned to use. The new chief executive, Matthew Ingle, sold MFI and disposed of peripheral businesses.

All that remained was Howden, the company he started in 1995.

Now onerous leases are reduced, the company has no bank debt, and though the pension deficit is still large, Howden is profitable enough to plug the gap and reward investors.

Management expects the company to grow by opening new depots, 20 in 2012 out of 529 in total. It thinks 700 are feasible, but 30% of the existing depots are yet to mature and should also make a greater contribution in future.

Carving out a unique business model in a competitive industry means being good at many interdependent things. It's the interdependence that makes the business hard to copy.

Howden concentrates on small builders. It gives them enough credit to install a kitchen and receive payment from their customers before paying for it. In return builders are its sales force and the end point of its distribution network.

The company keeps the entire range in stock so builders are confident they won't experience delays. Changes can be made to the specification of the kitchen right up until the builder picks it up. Howden also provides kitchen designers.

By manufacturing in high volumes and matching supply to demand it keeps costs low and depots are located on trading estates where the rent is cheap.

They're manned by only 10 staff motivated by a share in the profits of their depot.

The business model is even better crafted than the cabinets, but on an earnings yield of 6% that quality is already recognised by investors.