Taylor Collison initiation - RUL-Initiation.pdf

Very late to the game but might spark more interest. Initiation reports do give good background about the company too.

The 4 common traits of small-cap takeovers (and our top 8 targets for 2025) - Ben Richards | Livewire

RPMGlobal (ASX: RUL)

RPMGlobal offers a comprehensive enterprise platform with 30 integrated products covering the entire mining lifecycle, from design and planning to equipment management, ESG, and financial optimization, making it a "one-stop shop" for the industry. Its flagship AMT equipment management software, which accounts for 36% of ARR, dominates the market, servicing 9 of the top 10 global mining companies and major blue-chip clients like BHP, South32, Mineral Resources, and Pilbara Minerals. Additionally, RPMGlobal extends its reach by catering to mining services providers like Worley and OEMs, with ~70% of major equipment companies such as Hitachi relying on AMT.

We bought RUL shares at the inception of the Seneca Australian Small Companies Fund with an average price around $2.00. We thought it was highly likely that RUL will get taken over at some stage. We still think that's the case, despite the share price rally.

Synergies:

Acquiring RPMGlobal offers buyers in complementary industries—such as mining equipment, ERP, or geospatial technology—the opportunity to integrate its comprehensive solutions into their platforms. This not only enhances their product offerings but also creates significant cross-selling opportunities for mining-specific tools like scheduling, simulation, and maintenance optimization software, leveraging existing customer networks for expanded reach and revenue growth.

The acquisition could also unlock cost savings through streamlined operations. By optimizing R&D efforts, buyers can eliminate duplication and leverage RPMGlobal’s expertise in mining software. Shared infrastructure, such as data centres and cloud services, could reduce costs further, while aligning sales and marketing teams would enable more effective promotion of a unified product suite and deeper market penetration.

In addition to operational efficiencies, there are strong revenue synergies. Buyers can cross-sell RPMGlobal’s products into their existing customer bases, and vertical integration opportunities—such as bundling mining equipment or ERP systems with RPMGlobal’s software—would enhance customer value while creating long-term competitive advantages.

Scarcity:

RPMGlobal has spent over a decade building and acquiring a comprehensive suite of mining software products, establishing a market-leading position that would be nearly impossible to replicate from scratch. Its extensive network of major mining customers—including industry giants like BHP, Rio Tinto, Mineral Resources, Newmont, and Anglo American—provides a significant competitive moat. The company’s transition from upfront software licenses to a recurring subscription-based revenue model further enhances its attractiveness, delivering predictable and defensive cash flows.

Now entering the cash flow harvesting phase, RPMGlobal presents an appealing opportunity for financial investors seeking stability and scalability. The recurring nature of its revenue, coupled with its entrenched relationships across the global mining industry, positions RUL as a scarce and highly valuable asset in the mining technology space.

Gettable:

CEO Richard Matthews has consistently stated that RPMGlobal has been "built to sell," with a preference for a strategic buyer willing to pay a premium for synergies and exclusivity. Matthews, who owns ~3% of the company (~6.735 million shares valued at ~$21 million), is aligned with shareholders in securing a strong price in any deal. With extensive experience in M&A, Matthews has successfully sold ~50 businesses, including Mincom for A$315m in 2007 (delivering a 52% CAGR over three years) and eServGlobal’s US division for A$113.4m in 2010, far exceeding the company’s market cap and generating a 97% return in one year. Matthews’ track record and clear alignment make RPMGlobal well-positioned for a high-value sale to a strategic acquirer.

Cheap:

We analysed 23 comparable software transactions, which have traded at an average EV/EBITDA multiple of 27.9x. On a like-for-like basis, RUL trades at ~21x, reflecting a 25% discount to peers due to its conservative accounting practice of expensing R&D costs, unlike most peers that capitalize these expenses.

Focusing on the most comparable transactions in the mining software space, Sandvik acquired Deswik, a mine planning software provider, at an estimated EV/EBITDA multiple of 28-32x. Similarly, mine modelling software company Micromine was nearly acquired by AspenTech in 2022 for $900m, equating to an estimated 30x EV/EBITDA, aligning with broader industry benchmarks.

With growth supported by recently signed global framework agreements with major miners—enabling streamlined product rollouts across multiple sites—and the mining sector's strong performance, RUL is positioned to attract significant interest from corporate acquirers. Additionally, as growth and operating leverage become increasingly evident over the next 2-3 years, we believe RUL’s valuation premium could rise.

In the event of a takeover, we estimate ~40% upside potential for the stock.

Who might buy it?

RPMGlobal is most likely to attract interest from strategic buyers willing to pay a premium for synergies, exclusivity, and cost-saving opportunities. Logical candidates include large software vendors like SAP and Aspentech, which could integrate RPMGlobal into their distribution networks. Mining equipment manufacturers such as Caterpillar, Komatsu, and Hitachi, which have already white-labelled RPMGlobal’s simulation software, could benefit from exclusivity and enhanced integration through an acquisition.

Mining-focused technology companies like Epiroc or ASX-listed Imdex (ASX: IMD) may also find RUL appealing, leveraging its strong recurring revenue base (~80%) and potential for revenue synergies. Orica (ASX: ORI), a leader in mining explosives, is another potential buyer, given its recent acquisitions in mine technology and demonstrated interest in expanding its digital footprint. Lastly, private equity or other strategic investors could see RPMGlobal as a platform for further consolidation in the mining tech space.

Why now / what's the catalyst?

We believe the mining sector is set to experience an upswing, creating favourable conditions for RPMGlobal (RUL). The company is also at a profitability inflection point, with impressive incremental profit margins of 47% in FY24—a figure that continues to improve, further highlighting its strong operational leverage and growth potential.

Interesting, might increase demand for mine design but perhaps not if it's only new mines but may also increase the demand for RUL's AMT if more trucks to track.

AFR - Energy transition: Electric trucks will be 19 per cent less productive (afr.com)

Battery-powered mine trucks would haul less ore and spend less time on the road than diesel-fuelled alternatives, delivering a productivity hit of between 19 per cent and 33 per cent to Australia’s biggest export industry.

A study of the most viable truck decarbonisation options found miners producing bulk commodities such as coal or iron ore would need to spend more money deploying a higher number of trucks plus recharging infrastructure if they wanted to maintain output volumes when switching to a zero emissions fleet.

Mining technology consultancy Idoba said the switch to electric mining trucks was unlikely to be seamless and the next generation of mines could be designed differently to better suit the charging needs of electric trucks.

Idoba head of mine automation and technology Craig Rodgers studied the viability of switching to electric mine trucks with batteries that would either need to be recharged, swapped or supported by overhead power cable networks, known as “trolley assist”.

The study found that battery charging would consume more time than diesel refuelling and reduce the availability of a typical mine truck by 12.5 per cent.

The weight of batteries would also reduce the amount of ore carried by trucks; the study found the type of battery needed for a typical 230-tonne truck would be at least double and potentially three times heavier than diesel fuel tanks and engines.

.....

Mr Rodgers said the productivity hit from electric trucks would not necessarily mean lower export volumes of Australian commodities.

“I think the big miners would probably throw more trucks at the problem, which would effectively require more capital to do that, so there is an argument you would see a modest reduction in terms of return on invested capital for the miners,” he told The Australian Financial Review.

Looking through the CZZ report @Bear77 posted.

Noting that CZZ saw RUL losing market share to Deswik in design and scheduling.

RUL drew attention to the fact Deswik was acquired last year (completed early this year) by Sanvik ($26B swedish company) for around $700M. Deswik had 79M in revenue (with only 45% I take to be recurring SAAS like) for over 10x revenue! Of course at the market peak.

If you took the same multiple to RUL software ARR that would be valued at over $550M. Software isn't the same and a lot of caveats but seems RUL could be undervalued... then again a pressimistic view would be that they are competing against some aboloute gorillas and they were passed over for being acquired so their software may not be as great despite it being end to end. The advisory division may also be off putting.

Sandvik announcement below

Deswik will form one of three cornerstones in the newly-created division Digital Mining Technologies, established to accelerate the execution of Sandvik Mining and Rock Solutions’ strategic priority to lead the industry development of underground sustainability and productivity solutions in electrification, automation, digitalization and end-to-end optimization. The new division also includes Sandvik Mining and Rock Solutions automation solutions and the Newtrax telemetry and collision avoidance solutions.

Privately-owned Deswik, established in 2008 and headquartered in Brisbane, has approximately 300 employees and operates 14 offices in 10 countries. The company has demonstrated strong and profitable growth over the past decade in the large and growing mining software market.

Deswik’s revenue per October 2021, on a rolling twelve month basis, totaled AUD 79 million, of which the share of recurring revenue was approximately 45 percent, and with an EBITA margin of approximately 30 percent. Impact on earnings per share (excluding non-cash amortization effects from business combinations) will be accretive. The parties have agreed not to disclose the purchase price.

Taking a look at RUL which is like by some smart investors. It is owned by Forager, and the business is liked by Gurav at Intelligent Investor and Claude from A Rich Life albeit issues around the current valuation. Alex Hughes (now at Maven) liked it back in the day – not sure about now.

 Why is it interesting now?

RUL began the transition from perpetual license sales to SAAS sales in 2017 and now 5 years later in 2022 the transition is now complete. This has acted as a headwind to revenue and profit albeit RUL has managed to keep both relatively stable throughout the period and now looks set up for growth now this headwind is gone as seen below.  The company has also now built out the software product suite so R&D should stop growing keeping costs in control. In essence and inflection point seems to about to occur as operating leverage and revenue growth kicks in.

 Split in FY22 was 32% advisory and 68% software by revenue.

RUL clearly sees value in the shares and is currently doing an on-market buyback (they see themselves as undervalued compared to private peers).

The business

RUL provides advisory services and software to miners, mining services and OEMs. Previously the advisory business (consultants) was seen as a necessity in order to sell RUL software to miners and I believe this is still the case. In 2021 the GeoGAS division (a coal gas testing business) was sold to GeoGAS management, a small, profitable but no growth business that I don’t believe added much value moving forward so seemed like a sound move. Since 2013 the company has invested (in R&D and acquisition) over $171 million in building out the 41-software module product suite. Recent acquisitions include the move into ESG consulting acquiring Blueprint (2021) and Nitro, I think this maybe the same approach to use ESG mine consultants to sell RUL’s ESG mining software. The other acquisitions were modules in 2020 acquired Sudbury mine optimisation company (SOT and Attain modules) and IMAFS (Imafs module). Now RUL can provide end to end mine management.

Some modules include (and my understanding of what they do).

Mine design and scheduling are the biggest modules – management has called out AMT and EXECUTE as the ‘stand out products’ in 2022 and sees a substantial sales pipeline for AMT.

Management has said R&D will start to moderate with no new modules planned in FY23 but further work it transitioning some to the Cloud. RUL is also now looking to host customer data in the cloud.

As more mines are autopsied such as driverless trucks etc RUL should become more relevant. Battery metals needed for the transition are also likely to see the need for a number of new mines to be established even if coal mines are eventually shut.

Big well known mining customers. They service OEMs like caterpillar and also mining services companies like NWR Holdings ASX: NWH). So large addressable market.

As to why it is attractive it is the software division that shows the most promise. I don’t see the business as that different from Envirosuite and Pointerra in that vein.

Risks

·      Numerous competitors depending on the software module, but RUL is the category leader in many of them.

·      Commodity prices are high now but RUL should still fair okay in a falling commodity pricing market as many modules are used to reduce costs. There could still be some cyclicality though.

·      Exposure to thermal coal, okay over the next few years but they will need to be replaced (maybe?) longer term if it is phased out at some point.

·      Recently exited Russia highlighting it operates in developing markets which carry extra risk.  

·      FX would have a significant impact.

·      Was CF negative in 2022 but a one off and has over $34M in cash and no debt.

·      RUL is still trading on large multiple despite the recent sell off.

Guidance

Management provided some clear guidance for the first-time expecting revenue to grow to over $100m next year and EBITDA of around $14m. Placing RUL on a forward EV/EBITDA multiple of 24x if guidance is met. RUL did point out that there are headwinds with higher salaries given the global job market currently.

The business has seen some COVID disruption due to lack of travel so this could prove a tailwind as things open up.

The company could easily be an acquisition target from an overseas acquirer. In any case if we get a sell off could be an interesting one to pick up as a profitable, growing company.

Broker Forecasts below: