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

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Disclosure: TSX: RC - Long

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