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02
RDM Corporation: Cash-rich small cap turnaround, offers value and opportunity
Posted by: Gerry Wimmer
01/02/2012
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TOP IDEAS - NEW: Unlike RIM, Waterloo’s high tech company RDM Corp. (TSX:RC) is picking up momentum and may have a shareholder value-enhancing event in 2012.

RDM Corporation (TSX:RC -$0.88) has had a turnaround year. For its fiscal 2011 year, which ended September 30th, the Company reported a $3 million improvement in its earnings before interest, income taxes and depreciation and amortization (EBITDA), while generating $2.2 million in cash flow from operations. The new management team at RDM gets some of the credit for the turnaround, but business conditions for electronic commerce and payment processing (the Company’s key market in the USA), have also improved.

RDM is a provider of specialized software and hardware products for electronic payment processing. This high tech growth company has pioneered Remote Check Deposit systems and web-based image management and transaction processing services for retailers, small business, banks, financial institutions and government agencies. RDM also produces print quality and image quality control systems for global customers.

RDM’s Remote Deposit Capture (RDC) technology captures cheque images at corporate or merchant sites from customer payments. Instantaneously the cheque’s data is electronically transmitted and processed for deposit into the business’ account at its financial institution. For financial institutions this allows productivity and transportation savings by eliminating the paper cheque.

Financial institutions are deploying more resources behind the rollout of RDC technology in the USA for their commercial customer bases. As penetration of RDM hardware and software products increases amongst US businesses and their banks so does RDM’s recurring revenues from fees RDM earns on cheque images captured and processed. In 2011, the Company reported sales of $21.2 million.

More than 45% of RDM’s total revenues in 2011 were generated from recurring fees. Licenses for RDM’s image systems increased by 16% in 2011. Gross margins on sales in Q4 grew to 46%, as the Company’s turnaround took hold in 2011.

As reported in RDM’s 2011 audited annual financial statements, the Company held cash of $15.5 million ($0.73/share) with no debt and had net working capital of $20.3 million. Needless to say, RDM has a very strong balance sheet.

Currently trading at a discount to its net working capital, RDM shares offers tremendous value to investors. On a 12-month historical operating basis, RDM shares trades at a very inexpensive 2.3x EV/EBITDA ratio and less than 1x sales.

We recommend for value-conscious small cap investors that RDM shares be accumulated to $1.35 per share, which is equivalent to 5x EV/EBITDA 2011 Q4 results, if annualized.

RDM has considerable cash resources. The Company’s management has indicated that they will look to deploy cash for accretive acquisition opportunities in 2012, a shareholder value-enhancing event that could see RDM shares trade way beyond the $1.35 level.

We note that in December 2011, UK-based Perlus Investment Management reported it had acquired additional shares of RDM, increasing its ownership stake in the Company to 10.7%. It is a positive sign that institutional funds are interested in investing in RDM, which could attract more institutional investors and analyst coverage.

RDM has 21.2 million shares outstanding.

RDM website: www.rdmcorp.com

Please post your comments or questions on this article.

Disclosure: TSX: RC - Long


Read Disclaimer:

This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

Investorfile.com is not engaged in an investor relations agreement with RDM Corporation nor has it received any compensation from RDM Corporation for the preparation or distribution of this article.

The author of this article has acquired and may trade shares of RDM Corporation through open market transactions and for investment purposes only.

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Comments:
Posted by: Gerry Wimmer
David: Given Q3 results I think you would agree that RDM Corp (TSX: RC) has a very clear business model with 63% gross margins on their data processing business. They added $1.3 million to cash this quarter alone from this business. A cash cow and growing by 15% too. Investors are finally seeing the light and it is very bright for RDM shareholders.
Posted by: Gerry
David: My sense is the new RDM management will focus on growing the high margin and recurring data processing as revenue growth from this business in USA is returning post recession. The value is that RDM has over $15 million in cash and growing which is not reflected in the current stock price should they deploy by making a complimentary acquisition in data processing business or maybe special dividend to shareholders for $0.50+ per share. I expect will shall see in 2012. Gerry
Posted by: David Wolk
RDM management still unclear about its primarily business: data processing centre or developer/marketer of remote deposit capture hardware. Margins better on former and sales of the latter in long term decline but R&D expenditures continue. Hard to imagine RDM getting its collective head around a meaningful acquisition although Perlus seems to believe it could happen.
Posted by: Jack Lewis
RDM generated over $2.2 million in cash last year and hold $15.5 million cash. RDM has no debt. I do not think the market price reflects this yet. The stock price of RDM should be higher based on the balance sheet strenght alone.

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