Shares slumped 14% in RM after the educational product and services supplier warned that it will likely miss expectations for the full year ending 30 September, because of continued difficult trading in the period from 1 April to 21 July. It said “education market conditions continue to be tough in the UK and US… [and] it is difficult to predict accurately the outcome for the current period until after the summer.” However it said, “the balance of probabilities suggests an outcome that may be below the board's previous expectations.” Analysts had been expecting full year revenue of c£351m (down 7%) and earnings per share of 13 pence, although it now prepared investors to “anticipate a potentially difficult and unpredictable period in the near term.” Remember RM had a tougher than expected first half (see here), and has already announced actions on its cost base (see here).
We know how seasonal RM’s business is, however there is more going on here. RM has clearly been knocked badly by education spending cuts both sides of the Atlantic, and most notably the cancelation of the UK’s Building Schools for the Future (BSF) programme, in which it had established market leadership and had invested heavily over recent years. It will now be over the “next few years” that it benefits from the cash flow of past BSF investments. Although to mitigate some of the impact it has been actively reducing its debt, which stood at £11m on 30 June vs. £22.1m at the same point in 2010.
RM is continuing with its “comprehensive strategic review” which was launched following the appointment of new chairman Martyn Ratcliffe in May (see RM appoints Ratcliffe as chairman), the results of which are due by the late autumn. At this point it will then “take the necessary actions to mitigate the changes in the market environment”. Ratcliffe will need to keep the ship steady during what is proving to be a particularly challenging 2011 for RM and others in the education sector, though he will undoubtedly be tough in his actions.