UPDATE: RM Shares Fall As Spend Cuts Threaten Schools Revenue

6th Jul 2010 10:13

(Adds share price, analysts' comments, detail) By Hannah Benjamin Of DOW JONES NEWSWIRES LONDON (Dow Jones)--U.K. provider of educational products and services RM PLC (RM.LN) Tuesday said GBP200 million of future revenue is under threat from the U.K. government's decision to slash spending in schools, sending its shares down nearly 7%. The firm said seven Building Schools for the Future, or BSF, projects where it has been named preferred bidder are at risk of being axed. The projects--which have a total value of GBP200 million--will be subject to review and "may be scaled back significantly," the company cautioned in a statement Tuesday. At 0855 GMT, RM's shares were trading 11 pence, or 6.8%, lower at 151 pence, underperforming a 0.3% rise in the Dow Jones U.K. smaller companies index. The company has already reached financial close on 14 BSF projects, which are safe and will generate revenue during fiscals 2010 and 2011. But projects that are only "close to" financial close are to be reviewed by the government on a case-by-case basis. Last month RM announced it had received two contracts to provide information technology and internet services to schools in London and the southwest of England. One of these deals--with the London Borough of Barking and Dagenham--was expected to be worth up to GBP44 million over eight years. Investec Securities analyst Julian Yates said the impact of the spending cuts are likely to be felt by RM from fiscal 2012 onwards. The company had included GBP121 million of revenue from its seven preferred bidder contracts in its GBP505 million committed revenue order book but Investec's Yates said: "We would now expect this estimate to be revised down materially." He said on the flip-side RM can now wind down ongoing BSF bid costs, which should benefit its balance sheet, especially in fiscal 2011 once any needed restructuring has been done. But Yates left a "buy" rating on RM, telling clients: "Our positive stance has been based on the group's leading domain skills and presence in the schools' ICT market, which we do not see evaporating overnight." RM said it will continue to analyze the impact of the government's review and will update the market in due course. But Numis Securities analyst Will Wallis fears other parts of RM's business beyond its BSF work could also be impacted by the government's aggressive cost-cutting. He said the company will most likely be forced to cut costs. "The abrupt cuts to BSF suggests even greater caution on the overall effect of cuts on RM," Wallis told clients in a note. He cut his price target on RM to 170 pence from 195 pence and downgraded his fiscal 2012 pretax profit forecast by GBP2 million to GBP19.3 million. -By Hannah Benjamin, Dow Jones Newswires; 44-20-7842-9298; [email protected] (END) Dow Jones Newswires July 06, 2010 05:13 ET (09:13 GMT)