RCM Technologies: Mispriced mini conglomerate11.12.2022

Time of purchase: 03/12/2020

Time of disposal: 11/02/2021

As of 03/12/2020

Market Cap: $19,014,492

Net debt (cash & cash equivalents - total debt): $10,000,000

Enterprise Value: $29,014,492

Share price at time of purchase: $1.64

Share price at time of disposal: $9.90

There are a couple of things that made RCM Technologies a very attractive investment at a market cap of $19,014,492.

Company description, financial performance and valuation.

The company is a mini conglomerate, owning three unrelated businesses.

1) Specialty healthcare staffing.

This business provides healthcare staffing services, connecting healthcare professionals such as therapists, nurses, caregivers, etc with large government entities such as the New York Board of Education. For the period 2012-2019 revenues in this segment grew by 19% compounded annually (CAGR). With revenues at the end of year 2019 at $83 million and producing ~$6.9 million in EBITDA(Earnings before interest, taxes, depreciation and amortization). AMN, a bigger competitor, trades at ~12-14x EBITDA and is a much slower growing business with revenues growing at ~ 12% (CAGR) in the same period. Assuming a worst case scenario where the market values this segment at 8x EBITDA then we can assign ~$41 million to this segment. Base case 10x EBITDA = $69 million Best Case 12x EBITDA = $82 million.

2) Engineering services

This segment provides a wide range of engineering services such as:

Project Management Engineering & Design, Engineering Analysis, Engineer-Procure-Construct, Configuration Management, Hardware/Software Validation & Verification, Quality Assurance, Technical Writing & Publications, Manufacturing Process Planning & Improvement and 3D/BIM Integrated Design. Engineering services are provided at the site of the client or at the Company’s own facilities. From the period 2012-2019, sales of this segment have averaged $79 million with average EBITDA at $5.2 million. The reason I’ve taken average instead of looking at growth rate is the nature of this business is volatile, as the timing of contracts are irregular and contract size as a percentage of revenues are quite large. Hill International, Inc is a competitor operating in the same industry and it currently sells at 0.75x of sales. Once again if we value this segment at a conservative 0.5x of sales we get a valuation of ~$39 million.

3) IT & Life Sciences

The Company’s Life Sciences and Information Technology segment is an integrated group of business units providing staff supplementation services and project solutions with physical locations in the United States, Canada and Puerto Rico primarily supporting Financial, Technical, Manufacturing, Life Sciences and Distribution applications. Specialization in project solutions include, but are not limited to, the following areas:

● Life Sciences: Specializes in providing innovative options to pharmaceutical, medical device and biotechnology companies in need of guidance, support or remediation of quality, compliance or business challenges. The group assists in staffing, solution planning and remediation needs in the areas of automation, compliance, data analytics, technical quality assurance and management, and validation and verification.

● IT Services & Solutions: Global provider of business and technology solutions designed to improve the operational performance of our clients. Specialties include software development, infrastructure services, and managed IT solutions. The Company has a 40-year history of providing qualified IT candidates to customers in a timely and cost-effective manner to address their specific business needs. The Company offers scalable solutions that can provide emerging growth companies with a single qualified resource or an entire project team along with RCM’s project management oversight to Fortune 100 clients

This segment’s revenues have been declining YoY for the period 2012-2019 and over that time frame has an average EBIT of ~$1.59 million.

For the sake of simplification I’ll assign $0 to this business segment.

In combination.

Valuation cases.

Worse case: $70 million (41 + 39 - 10)

Base case: $98 million (69 + 39 - 10)

Best case: $111 million (82 + 39 - 10)

Large Insider buying

In early June 2020, the company, the CEO, CFO, and a board member purchased a block of just under 3mm shares of RCMT from M2O, the family office that had previously been the largest shareholder of the company (and a backer of the CEO’s activism on the company). RCMT repurchased 1.86mm shares, the CEO purchased 850k shares, the CFO purchased 150k shares, and a board member purchased 100k shares. The price for all purchases was $1.20 per share. These are possible signs that management thinks that the company is of a good value at this price range.

So here we have a business that has no risk of bankruptcy or material decline in the value of the company, selling at a worse case scenario of 28% of the actual value of the company. There’s also consensus action from management confirming the undervaluation as they’ve purchased roughly 27% of the company. These actions reinforce the valuations that I’ve made and the potential return here is more than 260%, depending on the timeframe that the market will revalue this business to a more appropriate level that reflects the fair value of the business.