RPM Global (RUL.ASX) Outperform Initiating coverage: 5 ......27 October 2019 Taylor Collison Limited 27 October 2019 RPM Global (RUL.ASX) Outperform Initiating coverage: 5 reasons

27 October 2019

Taylor Collison Limited 27 October 2019

RPM Global (RUL.ASX) Outperform Initiating coverage: 5 reasons to buy Current price $0.90

Stephen Scott

[email protected]

Summary (AUD)

Market Capitalisation $m $194.7

Share Price $0.90

52 week low $0.525

52 week high $0.935

Ave Monthly Vol (year rolling) 6,090,520

Key Financials (AUD)

Year End ($m) FY19 Act.

FY20 Est.

FY21 Est.

Revenue 80.1 84.8 91.0

EBITDA 5.9 9.8 11.7

NPAT (adj) -5.4 5.3 7.1

PE Ratio (x) -36.0 38.3 29.1

DPS 0.00 0.0 0.0

Div Yield 0.00% 0.0% 0.0%

Franking 0% 0% 0%

EV 162.7 152.8 152.8 EV/EBITDA 27.6 15.5 13.0

ROIC (post tax) 7% 19% 22%

Payout ratio 0% 0% 0%

(source: Actual + TC Estimates)

Share price graph (AUD)

(source - IRESS)

Taylor Collison initiates coverage of RPM Global with Outperform

• RPM (RPM Global) develops and implements enterprise software used in the mining industry. RPM also provides independent advisory services to the mining industry and has a smaller coal gas testing business.

1. RPM has reinvested significantly in new products, expanded up and down the mining life cycle, moved into new mining techniques and resource types. This provides a big inventory of new products that the business is rapidly monetising. This includes 15 new customers, 28 software upgrades and 43 functional upgrades in FY19.

2. Absorbed the financial cost of moving towards a subscription business. This is now starting to be put behind RPM and recent subscription sales will feed into future profitability.

3. Incurred a series of one-off costs into FY19, which if they fall away – will boost FY20.

4. Conservatively expensed R&D spend ($13.7m in FY19) now declines in absolute levels (run rate exit FY19 at $13.1m p.a) providing operating leverage and new products to sell.

5. Benefitting from more favourable mining industry conditions than in the past periods of adversity. The recent relatively stable conditions (helped by the AUD) should boost mining procurement executives’ desire to reinvest. Risks: - include the mining cycle, competition, technology, access to talent, client mining risk and the AUD.

Valuation and recommendation

• Outperform. Our valuation is $1.07 based on a blended DCF and EV/Sales (SOP) and EV/EBITDA methodology. Earnings are set to grow from a low base. The net cash balance sheet is also appealing. RPM has made the astute and tough decision to heavily reinvest in its products and transition towards subscription. This set of patient and disciplined decisions is now bearing fruit.

$-

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

XSO RUL

RPM Global initiation Page 2 of 18


1(source – TC and RPM)

1 TC = Taylor Collison

RUL RPM Global Price 0.900$

PROFIT & LOSS SUMMARY (A$m)Act Est Est BALANCE SHEET SUMMARY Act Est Est

Period 30-Jun-19 30-Jun-20 30-Jun-21 Period 30-Jun-19 30-Jun-20 30-Jun-21

Operating Revenue 80.1 84.8 91.0 Cash 28.3 31.9 41.9

Total Revenue Adj. 80.1 84.8 91.0 Receivables 20.8 22.0 23.7

EBITDA Adj. 5.9 9.8 11.7 11.7 Inventories 0.0 0.0 0.0

Dep'n -0.9 -0.8 -0.8 Other 5.6 5.9 6.4

Amort'n^ -3.1 -3.1 -3.1 Total Current Assets 54.7 59.9 71.9

EBIT Adj. 1.9 5.9 7.8 Property Plant & Equipment 1.7 1.7 1.4

Net Interest 0.3 0.3 0.3 Intangibles 34.2 36.1 34.0

Pre-Tax Profit 2.2 6.2 8.2 Other 2.8 3.0 3.2

Tax Expense -7.6 -0.9 -1.0 Total Non-Current Assets 38.7 40.8 38.6

Minorities 0.0 0.0 0.0 Total Assets 93.4 100.7 110.5

NPAT Adj. -5.4 5.3 7.1 Accounts Payable 7.8 8.5 9.1

Abnormals 0.5 0.0 0.0 Borrowings 0.0 0.0 0.0

Reported Profit^ -5.9 5.3 7.1 Contract l iabilites*/prov 24.2 25.4 27.3

Other 0.4 0.4 0.5

Margins on Sales Revenue Total Current Liabilities 32.4 34.3 36.8

EBITDA Adj. 7.4% 11.6% 12.9% Accounts Payable

EBIT Adj. 2.4% 7.0% 8.6% Borrowings 0.0 0.0 0.0

NPAT Adj. -6.7% 6.2% 7.9% Provisions 1.3 1.4 1.5

Other 0.1 0.1 0.1

Change on pcp Total Non-Current Liabilities 1.4 1.4 1.5

Total Revenue 5.9% 7.3% Total Liabilities 33.8 35.8 38.4

EBITDA Adj. n/a 66.9% 18.9% Total Equity 59.7 64.9 72.1

EBIT Adj. n/a 210.5% 33.0% check 59.7 65.0 72.1

NPAT Adj. n/a -197.3% 36.0% CASH FLOW SUMMARY

Period 30-Jun-19 30-Jun-20 30-Jun-21

PER SHARE DATA EBIT 1.9 5.9 7.8

Period 30-Jun-19 30-Jun-20 30-Jun-21 Add Depreciation 0.9 0.8 0.8

EPS Adj $ -0.025 0.023 0.031 Amortisation 3.1 3.1 3.1

Growth (pcp) n/a -194% 32% Change in Working Capital 0.3 0.4 0.5

Dividend 0.000 0.000 0.000 Other non cash/unusual items 1.6 -0.1 -0.1

Franking 0.0% 0.0% 0.0% Less Tax Paid -0.8 -0.9 -1.0

Gross CF per Share 0.03 0.04 0.05 Net Interest 0.3 0.3 0.3

NTA per share 0.28 0.13 0.18 Gross Cashflows 7.3 9.5 11.4

Net Capex -0.7 -0.8 -0.4

KEY RATIOS (Acquis/Divestments/oth -2.6 -5.0 -1.0

Period 30-Jun-19 30-Jun-20 30-Jun-21 Other Investments -0.2 0.0 0.0

Net Debt / EBITDA Adj. (x) -4.80 -3.24 -3.57 Free CF's Attributable 3.8 3.6 9.9

Net Debt : Equity (%) -0.5 -0.5 -0.6 Dividends Paid 0.0 0.0 0.0

EBIT Interest cover (x) -6.3 -20.8 -24.6 Debt Inc.(Repaid) 0.0 0.0 0.0

Current ratio (x) 1.7 1.7 2.0 Equity Issued/(Buyback) 0.3 0.0 0.0

ROE Adj. (%) -9.0% 8.1% 9.9% Cash Flows 4.1 3.6 9.9

ROIC Adj. (%) 7.1% 18.8% 21.8%

Adj. Dividend Payout Ratio (%) 0.0% 0.0% 0.0%

VALUATION MULTIPLES

Period 30-Jun-19 30-Jun-20 30-Jun-21

PER Adj. (x) -36.0 38.3 29.1

Dividend Yield (%) 0.0% 0.0% 0%

Free CF Yield 3.7% 4.9% 5.8%

EV/EBITDA (x) 27.6 16.5 13.9

EV/EBIT (x) 85.7 27.6 20.7 ^ we note that amortisation expense (tax adj) could arguably be added back to derive higher normalised profit

* mostly contract liabilties relating to subscription contracts - ($19.6m in FY19)



Initiating coverage: dialing up the RPM’s – time to buy

Investment thesis – 5 reason to buy (and outperform) … a recap

✓ RPM (RPM Global) has significantly reinvested into new products that has enabled it to expand up and down the mining life cycle and moved into new mining techniques (and resource types). This provides an inventory of new products that the business is monetising. The most recent example of RPM product innovation is the launch of the Underground Metals Solution Optimiser for mine planning customers. This software integrates into other parts of the RMP software suite.

✓ Absorbed the cost of moving towards a subscription business, and recent subscription sales will feed into

future profitability.

✓ Incurred a series of one-off costs in FY19, which when they fall away – will provide a boost for FY20.

✓ Expensed R&D spend ($13.7m p.a in FY19) now declines in absolute levels providing operating leverage. The exit run rate on R&D is $13.1min (late FY19) and should fall in absolute terms in FY20.

✓ Mining Industry conditions are more favourable than in past periods of adversity. The recent mostly

relatively stable conditions (helped by the AUD) boost mining procurement executives’ desire to reinvest in software.

Valuation commentary We have modelled strong earnings growth from a depressed earnings base into the next few years. We believe that the business is being undervalued with the growth from the software subscription business partially lost in the transition towards subscription overall business structure. Method 1 - SOP valuation using EV/sales multiples

(source – TC estimates)

Software Sales FY20 F Sales multiple valuation

License sales 9.1 1.0 9.1

License subscriptions 9.4 8.0 74.9

Maintenance 20.7 6.0 124.3

Consulting 13.8 0.7 8.9

Total software sales 52.9

Advisory 27.2 0.7 17.7

Geogas 4.7 1.0 4.7

Sum 84.8 239.5

EBITDA multiple

Less corporate costs -8.20 4.00 -32.8

Add cash (less AASB16) 27.9

Valuation 234.7

Shares outstanding 216.3

Price per share 1.08$



We note that comparable ARR2 software valuation multiples varying from 8-11X sales. TC have ascribed sales multiples based on comparable companies and from industry analysis (also refer to the Comparables section of this note). Unlike some of the newly listed and unlisted software businesses. RPM has sufficient cash balances, an installed customer base, generates cash from operations (and importantly free cashflow) and the underlying mining industry is in better shape than in the past. Continued growth in subscription revenue will help highlight the value being created by the business. Method 2 – shows that using an EV/EBITDA valuation – we derive a valuation of $1.06. Some of the larger comparable business are valued much more highly again than our ascribed multiple of 17X (EV/EBITDA). Method - 2 – EV/EBITDA analysis

(source – TC estimates) The RPM business may also appeal to other bigger players, over time, given the newly renovated code base, updated product set, possible synergies in merging with other players and even the value of the tax losses which might appeal to others. We simply note this as optionality in RPM’s valuation – the investment case is based on sound fundamentals and on our valuation. Method 3 - Our DCF based modelling yields a DCF price 99 cents.

2 ARR – Annual recurring revenue – yearly subscription sale. TCV = total contracted value – total value of a subscription deal – normally a 3 year term

EV/EBITDA multiples

EBITDA Multiple Valution

Software 12.4 17.0 211.3

Advisory 3.1 4.0 12.5

Geogas 2.5 4.0 10.0

Summary 233.8



Valuation 228.9





Company overview RPM Global develops and distributes enterprise software used in the mining industry. The business also provides independent advisory services to the mining industry (and related industry participants) and has a smaller coal GeoGAS testing business. The business has 20 offices and two laboratories, across 13 countries and has worked in over 125 countries. RPM employs over 325 people including approximately 100 in software development. RPM’s HQ is in Brisbane. RPM has operated for over 50 years, has over 5,000 software installations and has produced over 15,000 studies (within the advisory business). The XPAC product for example has been in use for 40 years. Exhibit 1 – RPM global footprint map

(source – RPM)

Exhibit 2 further demonstrates the breadth and scope of the RPM businesses’ client base across all its divisions Exhibit 2 – client base by division

(source RPM)



Software: - the business develops and implements software used across most of the mining process including licensing, consulting, subscription, implementation and maintenance of software. The software is used in the mining and energy (oil sands) industry. The business provides excellent disclosure through detailed breakdown of sales (table 1). The software business provides a consulting service that supports the software business. Table 1 – financial profile of the software business

(source – RPM)

Software includes mine scheduling, financial costing/budgeting, simulation and asset management within the mining industry. The business also provides training in the use of the software suite. The software now operates across most of the value chain of mining from exploration to production. We expect that further modules will be added to help expand into underpenetrated parts of the mining cycle and that logically bolt on to the existing product set(s). Exhibit 3 – product suite

(source – RPM)

Software sales FY18 1H19 2H19 FY19A

License sales 13.6 5.1 7.0 12.1

License subscriptions 0.8 0.8 1.6 2.4

Maintenance 19.6 10.9 10.9 21.8

Consulting 10.7 6.3 6.2 12.5

Total software sales 44.7 23.1 25.7 48.8

Contribution

Software 7.40 3.20 5.40 8.60

Contribution margin 16.6% 13.9% 21.0% 17.6%



Exhibit 4 – Software uses in RPM’s Enterprize Planning Framework (EPF)

(source – RPM)

The software suite can be broken into distinct product sets which cover most of the mine life cycle from design through to production (as depicted in the product suite chart) including: -

1. Mine Design/reserving through the “Reserver” software product.

2. Mine Enterprise Planning Framework (EPF) – products include enterprise planning framework facilitated using data collaboration protocol (ISA 95) into other 3rd parties.

3. Mine Planning and Scheduling - XPAC and Xecute are desk-top solution. Commodity modules within this

family include open-pit metals, open-pit diamonds, oil sands, open-pit coal, open-pit phosphate, underground metals, quarry, stratigraphic metals, and steep coal. These are the core product(s) of the business.

4. Mine Simulation – products include Haulsim, Simulate, Talpac, Taplac underground, Dragsim

5. Mining Financials products include Xeras – (budgeting)– integrates into SAP ERP (Enterprizse resource

planning).

6. Mine Operation – Shift manager/Minvu – including very short term through to longer term planning.

7. Mine Asset and equipment maintenance include AMT, AMT for contractors and AMT for OEM’s Taylor Collison has been shown the Xecute and Design products through a comprehensive product demonstration.



The major product set for the EPF is shown in the table below through time by function/relevant module(s) and via customer. Exhibit 5- RPM product suite

(source RPM)

Each of the new updates are (where possible) linked into the core Enterprise Planning Framework (EPF). The software also can have API3 and at times Resellers/implementors and/or partners may include ESRI, CAT, SAP, Microsoft, Mineware, Modular, Orica, Oracle and Schneider. The business is developing linkages with OEMs (original equipment manufacturer) such as CAT in the mine simulation business. Major geographic segments for the software business include Australia and Asia (mainly Indonesia) in coal, iron ore and metals, US/Canada (oil sands, metals and some coal), South Africa (coal, metals), Latin America (mainly metals but may skew towards coal over time). Advisory - provides advisory services which cover the entire mining life cycle from exploration through to production. Services cover exploration, management advice, geological modelling, resource definition, due diligence studies, feasibility studies, reserve definition, environment and social services, expert witness and legal support, asset advisory support and valuation, appraisal and fairness opinion. Advisory clients include mining companies, financial institutions, customers of mining companies (e.g. coal-fired electricity generators), lessors of mineral rights, government departments and agencies and related suppliers to the mining industry. The advisory service can be bespoke and/or independent depending on the client’s needs. RPM also produces a series of technical papers which have detailed insights into geology, engineering and the logistics of mining.

A. Mining project services - Services include helping clients systemise operational improvements, improve cost structures, increase productivity and create value across the entire mining chain from design through to production and maintenance. These services include geology and exploration, mining studies, operational scenario analysis, technical site support and business process improvement, mine planning, resource estimation and feasibility studies and mine budgeting.

3 API = Application program interface – allows software to talk to each other – specifies protocols to enable software to interact



B. Investor services -the advisory business can also partner with investment firms to deliver deep domain expertise and these areas may include M&A, Lender’s engineering, IP and capital-market transaction support, asset analysis and ranking, JV and technical representation.

Advisory covers the following areas – base metals, battery minerals, iron ore, laterite ore, open-cut coal, underground coal and uranium. The resource mix for the advisory business can change depending on project timing and timing of work won.

C. Operational services – helping mining companies to optimise performance – including helping to understand the impact of business decisions before the decisions are made.

Advisory also offers training services to the mining industry. The market for advisory services is reliant on mining expansion, development, financing, transacting of mining assets and projects. Advisory tends to service coal and metal(s) segments. Table 2 - Advisory business

(source TC and RPM)

GeoGAS – Laboratory testing (both exploration and compliance testing) – to the coal and related industry on the east coast of Australia. This includes both coal mining (compliance and safety) and coal exploration businesses. Table 3 – GeoGAS division

(source – TC and RPM)

Sales FY18 1H19 2H19 FY19A

Advisory 23.9 11.0 14.9 25.9

Contribution 2.9 0.5 2.5 3.0

Contribution margin 12.1% 4.5% 16.8% 11.6%

Sales FY18 1H19 2H19 FY19A

Geogas 4.6 2.2 2.5 4.7

Contribution 2.1 1.0 1.5 2.5

Contribution margin 46% 45% 60% 53%



Management Directors Mr Allan Brackin – Chairman– Joined the business in 2011. Mr Brackin has been involved in the technology industry for over 30 years both as an executive and non-executive level. Mr Brackin was CEO and Director of prior ASX listed player Volante. Prior to that Mr Brackin established IT businesses that were acquired by Volante. Current directorship includes GBST (GBT, not covered), Opticomm (OPC, not covered) and Sensera (SE1, not covered) Mr Stewart Butel – appointed Sept 2018. Mr Butel has 40 years’ experience in the resource industry including NED of Gladstone Ports and Chair of Stanmore Coal. Mr Butel was formerly MD of Wesfarmers Resources, having joined Wesfarmers in 2000. Mr Butel is also the past director of Duet (DUE, not covered). Mr Ross Walker – Joined the board in 2007. Mr Walker was a senior executive and managing partner of Pitcher Partners with over 20 years’ experience in audit, corporate finance, valuation, capital raisings and M&A. Currently a NED of Wagners (WGN, not covered). This is an experienced and well credentialled board. Dr Ian Runge has been director since 1986 and established the business. He is the “R” in RPM. Dr Runge has an engineering, business and economic background is a leading player in the resources and software industry within Australia and globally. Dr Runge left the board on 30 June 2018, however, still retains an active interest in the mining /software industry and the economics of it. Management Mr Richard Mathews – MD and CEO – appointed 2012. Mr Mathews has had senior roles at JD Edwards, CEO of Mincom and eServe. Mr Mathews has also sat on the Telstra Health board. Other senior staff include Mr M Kochanowski CFO who has been with the business for over 10 years, Mr Paul Beesley CTO (ex eServe/Mincom), Mr David Batkin EGM Consulting (Ex Mincom/JD Edwards) and Mr Phillipe Baundry - EGM Advisory – started in 2008 as a geologist and is qualified /competent person (43-101) plus JORC. Importantly many on the board and within management have seen and understand at least a few resources cycles (good and bad).



Risks (may include but is not limited to) Resource industry capex and willingness to invest in software. Reasonable prices tend to help open investment in new software in the resource industry with the converse true in a major downturn. Commodity prices. Deterioration of client relationships. Major client relations may deteriorate and /or be natural conflicts within the advisory business and other parts of the business. Resource industry operational risks – the underlying customers may suffer from geotechnical problems, financial failure or natural disasters which impact their ability to pay. Takeover risk – customer(s) from time to time may be taken over by another player – that does not use RPM’s software and/or prefers another solution. Legal action/litigation that may come from customers that use the advisory services. From time to time the business has faced these sorts of risks. Mine life – customers may simply mine the existing deposit and shut down. Technology – changes in code-based requirements, movements into the cloud, faster bandwidth, picking the right data base requirements are important factors that require careful management. Cyber security – given the mission critical nature of the software it simply must be resistant to hacking, data breaches, sabotage and straight out theft. Customer bad debts – the business needs to be able to collect from customers. From time to time amongst some of the developing country jurisdictions and /or smaller miners (generally within Advisory). The client can fall over or simply refuse to pay. Competition – larger software vendors from data base players and enterprise business have interest in expanding into new industries and may be attracted to invest heavily into the mining industry. Collaboration risk – the business relies on integration into other software platforms and access to others’ software to create links – examples would be SAP ERP and Microsoft. Denial of access would be problematic for the business. Access to talent. Skilled software engineers and those with domain or industry expertise can be expensive to hire, hard to replace and have mission critical knowledge. Product failure – if the software/service has errors the consequences can be expensive. Regulatory risks – such as changes to taxation, nationalisation of mining, poor governance policies leading to political unrest (wars/terrorism). AUD – the business benefits from a falling AUD in terms of both revenue that it bills in USD and other currencies and the positive impact the fall has for Australian based commodity producers.



Financial model/analysis The business has a balance sheet we like. Net cash. RPM did step up the provision for bad debts into FY19 due to a change in sales mix. There is an accounting change with respect to right of use leases (AASB16) which will add c$4.m to hard assets and c$4m to liabilities at the same time. We don’t think this is an overly material change for RPM and have not yet modelled it into our forecasts. Table 4 - Balance sheet analysis in $Am


Balance sheet

FY18 FY19 Comment

Current assets

Cash 23.3 28.3 Extremely strong - good cashflow business

Trade receivables 21.4 20.8 Client base, FY 19 includes big loss allowance

Contract assets 3.1 3.0 WIP

Current receviable 0.3 0.2 Receivables/deposit

Other assets 1.2 2.4 Mainly prepayments

Total current assets 49.3 54.7

Non current assets

Trade receivable 0.2 0.2 Receivables/deposit

PP an E 1.9 1.7 Small

Deferred tax 9.1 2.7 Written down

Intangibles 37.2 34.2 Goodwill /software

Non current assets 48.4 38.8

Total assets 97.7 93.5

Current liabilities

Trade payables 7.6 7.8 trade payables/accruals

Provisions 4.6 4.6 Mainly employee benefits

Current tax liabilities 0.1 0.4

Other liabilities 16.5 19.6 Liabilities realting to software contracts

Total current liabilities 28.8 32.4

Non Current liabilities

Provisions 1.4 1.3 Mainly employee benefits

Other liabilities 2.3 0.1

Total non current liabilities 3.7 1.4

Total liabiities 32.5 33.8

Equity 65.2 59.7

Notes

The business has tax losses that should take some time to be used up.

No franking credits

Some contigent liabilities around right of use rental and property leases



Cash flow analysis Cash conversion is good and there are no concerns with respect to this conversion. The business tends to invoice for software maintenance into 2H of each financial year and there is a client budget flush towards the end of the 2H. Table 5 – cash flow conversion in $Am

Item 2017A 2018A 1H19A 2H19A FY2019 Average

Cash oper. Activities 2.2 7.7 -1.2 9.3 8.1 18.0

EBITDA 4.6 4.4 0.9 5.0 5.9 14.9

% conversion cash/EBITDA 48% 175% -133% 186% 137% 121% (Source RPM accounts)

Cost analysis We have assessed that about c9% of the cost base (not related to R&D) is fixed – refer to table 6. There is a further portion that is likely semi variable. As discussed earlier, operating leverage comes from the reducing R&D spend, prevention of one-off expenses and reduced bad debt charges. The advisory business can also alter head count for the correct utilisation rates and the business can move people around according to demand to some extent. GeoGAS cost base is fairly fixed. The business will also be impacted by the AASB16 change with respect to right of use leases into the FY20 year. Rent will likely decrease by $2.8m offset by depreciation rising $2.5m and interest increasing by 200k. NPAT is not impacted and the cash impact is neutral. We have not modelled this change into our forecasts in order to be able to keep apples to apples comparisons between the years. When the change comes through TC will make the required adjustments. It does not impact our investment case. Table 6 – Past Cost Performance in $Am

(source – RPM and TC assessment)

Cost analysis

Item FY2018 FY2019 % growth % 19 sales Fixed/variable/semi variable

Revenue 73.1 79.3 8.5%

Rechargable -5.5 -6.1 10.9% The business onsells some software

Gross profit 67.6 73.2 8.3%

Expenses

Amortisation -2.6 -3.1 19.2% 4.2% may decline

Depreciation -0.7 -0.9 28.6% 1.2% modest cost - variable

Employee benefits -46.9 -49.8 6.2% 68.0% Variable / resumed pay rises

Commissions -3.9 -3.2 -17.9% 4.4% Variable

Other employee costs -0.8 -1.0 25.0% 1.4% semi variable

Office expenses -2.6 -2.5 -3.8% 3.4% semi variable

Professional services -1.4 -1.9 35.7% 2.6% Variable

Russian litigation -0.3 -0.2 -33.3% 0.3% zero out

Rent -3.4 -3.4 0.0% 4.6% Fixed

Travel expenses -2.5 -2.8 12.0% 3.8% variable

Other costs -1.6 -2.7 68.8% 3.7% semi variable

Total expenses -66.7 -71.5 7.2%

PBT 0.9 1.7



Financial model Sales Table 7 – sales forecasts in $Am

(source RPM and TC forecasts)

Subscription revenue is set to grow strongly, and we have made assumptions around ARR with it already reaching $7m in late August 2019. Over time this will cannibalise perpetual license and related maintenance revenue. We do assume growth in overall software sales. How much perpetual sales may decline is not that clear as some clients’ will always want to buy the software outright via a perpetual license. We have assumed some deflation in Perpetual license and flat/slightly declining maintenance revenue. We would note the quality of subscription revenue is far higher and more highly valued by investors and so the switch makes intuitive sense. Software consulting will grow in line with overall software sales growth. Advisory – we have modelled modest sales growth in the business. There is increased demand but also a degree of competition in winning new assignments GeoGAS – we have modelled no sales growth in this business. We have not assumed any acquisitions for RPM in totality.

RPM

Divisional analysis FY19A FY20F FY21F FY22F

Sales

Software

License sales 12.1 9.1 6.8 5.8

License subscriptions 2.4 9.4 16.4 21.8

Maintenance 21.8 20.7 19.7 19.7

Consulting 12.5 13.8 14.9 16.0

Total software sales 48.8 52.9 57.7 63.3

Advisory 25.9 27.2 28.6 30.0

Geogas 4.7 4.7 4.7 4.7

Other revenue 0.7

Corporate

Total sales 80.1 84.8 91.0 98.0



EBITDA margins We have assumed growth in the software business EBITDA margins – driven by reduced R&D, less one-off expenses into FY20, past Subscription sales feeding into higher profitability and inherent operating leverage from higher sales growth rates. Table 8 – EBITDA margin forecasts in $m


We have modelled flat margins for the GeoGAS business. GeoGAS has high margins now and a relatively fixed cost base. A fixed cost base would mean that a decline in sales will dis-proportionately harm EBITDA. We have assumed unchanged margins for the Advisory business. Margins are somewhat capped in Advisory by competition and customers limited willingness to pay for value. Advisory can reduce its work force if demand falls. Advisory should also benefit from a reduced bad debt expense provisions in this business grew due to the sales mix into higher risk jurisdictions required a greater bad debt provision assumption. Operating leverage – we assume that each $1 increase in revenue converts into 84 cents of EBITDA via our operating leverage analysis. This is due to off expenses falling, R&D falling and a higher margin sales mix into FY20 (software subscription vs other lines of business).

EBITDA FY19A FY20F FY21F FY22F

Contribution

Software 8.6 12.4 14.1 16.8

Advisory 3.0 3.1 3.3 3.4

Geogas 2.5 2.5 2.5 2.5

Total contribution 14.1 18.0 19.9 22.7

Less

Adjustments -8.20 -8.2 -8.2 -8.2

Corporate

Other

Total EBITDA 5.9 9.8 11.7 14.5



Table 9 – operating leverage in $Am and then percentage

(source – TC analysis)

D&A - Amortisation is likely to fall after FY21 as the business has essentially amortised fully the relevant software. This might change, if the business acquired again, but it is an upside for the business in an accounting profit sense. The business does not capitalise software development but conservatively expenses it. Capex – fairly low – there is some need to fit out offshore offices, but we think the business retains a low capex profile. Interest costs/debt Net cash business Tax rate – RPM has very substantial tax losses and will take some years to use these up in Australia. Some cash tax is due in offshore locations that do not have the benefit of major losses. We estimate that the business will pay c$1m in cash tax for the next few years.

Valuation

Table 10 - Sales/EV - SOP valuation

(source TC)

Operating leverage FY19A FY20F FY21F FY22F

Change in sales 6.4 4.7 6.2 7.0

Change in EBITDA 1.5 3.9 1.9 2.8

% oper. leverage 23.4% 84.2% 30.2% 39.9%

Estimated fixed vs variable costs

Software Sales FY20 F Sales multiple valuation

License sales 9.1 1.0 9.1

License subscriptions 9.4 8.0 74.9

Maintenance 20.7 6.0 124.3

Consulting 13.8 0.7 8.9

Total software sales 52.9

Advisory 27.2 0.7 17.7

Geogas 4.7 1.0 4.7

Sum 84.8 239.5

EBITDA multiple



Valuation 234.7





Table 10 is our assessment of an EV/Sales SOP valuation and demonstrates upside in the business. Given the business is quite diverse – we feel this helps to reveal value within the software business. Relative P/E based valuation are arguably less applicable given the expensed nature of R&D, high future growth rates and tax losses. DCF - We have also undertaken a traditional DCF valuation and derives 99 cents this is also supportive of upside.

Comparable(s) We have assembled a series of comparable business both domestic and even some offshore competitors. The valuation of the business stacks up well against the metrics. Table 11 – comparable valuation table

In Summary We believe the business offers good value, has sound prospects and has a valuable position in an industry with good prospects. Outperform

PE EV/EBITDA EV/sales

Name code Last price Market cap FY20E FY20E FY20E

Nearmap NEA 2.78 1,252 82.9 11.7

Bravura BVS 3.80 926 23.9 13.0 2.6

Infomedia IFM 2.28 726 38.0 16.0 7.5

Integrated Research IRI 2.81 483 20.8 11.1 4.4

Altium ALU 32.52 4,257 70.2 45.2 19.6

Hansen HSN 3.39 671 17.4 6.0 1.5

Gentrack GTK.NZ 5.12 505 33.7 17.0 4.4

Serko SKO.NZ 4.42 358 170.0 85.5 10.7

Multinationals -

SAP SAP.GR 119.22 146,641 91.7 21.8

Hexagon (Euros) HEXA.B.SS 44.54 15,588 86.3 52.5 17.8

Dassault Syteme DSY.FR 134.15 34,879 37.7 23.2 8.2

Rockwell Automation ROK.US 177.38 20,753 20.6 14.3 3.2

Constellation Software CSU.CN 1305.01 28,580 43.8 30.1 8.1

Average 59.0 35.3 10.0

Median 37.8 20.1 8.2

RPM Global RUL 0.90 195 38.3 15.5 1.9

P/E Small Ords (PERXSO) 18.0

P/E ASX 200 Ind (PERXNJ) 23.4

source - Bloomberg estimates/ Iress PERXSO Aug/ prices may be a few days old



Disclaimer

The following Warning, Disclaimer and Disclosure relate to all material presented in this document and should be read before making any investment decision.

Warning (General Advice Only): Past performance is not a reliable indicator of future performance. This report is a private communication to clients and intending clients and is not intended for public circulation or publication or for the use of any third party, without the approval of Taylor Collison Limited ABN 53 008 172 450 ("Taylor Collison"), an Australian Financial Services Licensee and Participant of the ASX Group. TC Corporate Pty Ltd ABN 31 075 963 352 (“TC Corporate”) is a wholly owned subsidiary of Taylor Collison Limited. While the report is based on information from sources that Taylor Collison considers reliable, its accuracy and completeness cannot be guaranteed. This report does not take into account specific investment needs or other considerations, which may be pertinent to individual investors, and for this reason clients should contact Taylor Collison to discuss their individual needs before acting on this report. Those acting upon such information and recommendations without contacting one of our advisors do so entirely at their own risk. This report may contain “forward-looking statements". The words "expect", "should", "could", "may", "predict", "plan" and other similar expressions are intended to identify forward-looking statements. Indications of and guidance on, future earnings and financial position and performance are also forward looking statements. Forward-looking statements, opinions and estimates provided in this report are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Any opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice and Taylor Collison assumes no obligation to update this document after it has been issued. Except for any liability which by law cannot be excluded, Taylor Collison, its directors, employees and agents disclaim all liability (whether in negligence or otherwise) for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by the recipient or any other person directly or indirectly through relying upon the information. Disclosure: Analyst remuneration is not linked to the rating outcome. Taylor Collison may solicit business from any company mentioned in this report. For the securities discussed in this report, Taylor Collison may make a market and may sell or buy on a principal basis. Taylor Collison, or any individuals preparing this report, may at any time have a position in any securities or options of any of the issuers in this report and holdings may change during the life of this document. This report was prepared solely by Taylor Collison Limited. ASX did not prepare any part of the report and has not contributed in any way to its content. The role of ASX in relation to the preparation of the research reports is limited to funding their preparation, by Taylor Collison Limited, in accordance with the ASX Equity Research Scheme. ASX does not provide financial product advice. The views expressed in this research report may not necessarily reflect the views of ASX. To the maximum extent permitted by law, no representation, warranty or undertaking, express or implied, is made and no responsibility or liability is accepted by ASX as to the adequacy, accuracy, completeness or reasonableness of the research reports.

Analyst Interests: The Analyst DOES NOT hold shares in RUL..ASX. Other Staff (including Principal accounts) may hold shares in RUL: ASX, in personal and family related accounts. These holdings may change during the life of this document. Corporate Actions and Fees: Taylor Collison Limited has NOT received any fees from RUL.ASX in the last 12 months. Taylor Collison, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may affect transactions which are not consistent with the recommendations (if any) in this research. Taylor Collison may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. Accordingly, Taylor Collison employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Analyst Certification: The Analyst certifies that the views expressed in this document accurately reflect their personal, professional opinion about the financial product to which this document refers. Date Prepared October 2019 Analyst: Stephen Scott Release Authorised by: Scott Dolling

Documents

RPM Global (RUL.ASX) Outperform Initiating coverage: 5 ......27 October 2019 Taylor Collison Limited 27 October 2019 RPM Global (RUL.ASX) Outperform Initiating coverage: 5 reasons