The Investment Column; RM earns top marks in IT

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Investors may feel uneasy buying shares in RM, the software supplier whose main "clients" are primary schools. But the dynamics of the fast- growing education software market are very different to those of commodities markets - any company driving a hard bargain with a headteacher will soon be expelled from the premises. RM's strength is in the quality of its relationships with 30,000 schools.

New Labour's commitment to wiring schools to the National Grid for Learning has seen it pour cash into the UK IT market, expanding opportunities for RM's activities in software and hardware manufacture, distribution and service supply. RM's sales have only grown in line with this market, and it has struggled to hold its leading 50 per cent market share.

After an exceptional surge in education spending, software and services revenues rose by 67 per cent and 52 per cent, together delivering pounds 33m in revenues. Sales of RM-branded personal computers contributed pounds 33m to revenues, up a mere 28 per cent. Distribution added another pounds 5m. Pre-tax profits rose to pounds 2.49m (pounds 640,000).

RM lacks any distinction as a PC maker, as its 5 per cent margins here show. The driver for future growth is its 200-strong team of software techies, who will have their work cut out when schools encounter difficulties integrating Microsoft's forthcoming Windows 2000 operating system. As well as being an Internet service provider, RM is a Net content provider, although advertising on the site is restricted.

Establishing new relationships will be harder now the market's hotted up, but with government spending on education IT rising pounds 100m this year and next, and pounds 200m annually after that, RM could make a tidy sum standing still. Although there is no model for overseas expansion, RM has already earnt top marks in Australia.

The shares fell off 3.5p, in line with the market, to 521p yesterday. WestLB Panmure Gordon upgraded forecast full-year pre-tax profits to pounds 12.5m, with earnings of 9.6p. That puts the shares on a heady forward p/e of 54; cheap in comparison with some IT companies, especially given this IT company has almost guaranteed earnings growth in the next several years.

Comparisons with Freeserve may be going too far, but RM's entrenched position provides it with risk-free earnings growth and the shares are good value.