FDM Group: Asset poor and too pricey

London-listed FDM Group Holdings (LON:FDM) has a market capitalisation approaching £1bn and approximately 3,500 employees worldwide. Its principal business activities involve sourcing, training and placing its own permanent IT and business consultants at client sites.

It also supplies contractors to clients and specialises in a range of technical and business disciplines including development, testing, IT service management, project management office, data services, business analysis, business intelligence and cybersecurity.

It has nine training centres and says it monitors trends to identify new opportunities for services, working closely with existing and potential clients to understand their strategy and expected future technology direction. It re-evaluates its training to ensure it delivers a consultant workforce suited to the wide range of technology roles required.

Its strategy is to increase its consultant numbers (3,170 at end 2017) and revenue (£207m at end 2017). Revenue gross margin is around 45% and performance measures have risen consistently.

FDM also aims to steadily increase its base dividend on an annual basis broadly in-line with its growth in earnings per share. It expects to achieve this given it has no debt or capital commitments and has sufficient distributable reserves and cash.

While the company has a global footprint, almost two-thirds of its 2017 revenue came from the UK (£107m), followed by North America (£74m). Given those permutations, FDM cannot predict the impact of Brexit.  

Risks

These are each shown in the table below in impact and likelihood of occurring. The risk that is most likely to occur is its concentration in the financial services sector, but one that would have the greatest impact is a cyber-attack. It also has significant exposure to: reputation, too many consultants, economic change, and undersupply of recruits.

For: It has very high interest cover – not surprising when it has no debt, and its finance charge is actually a non-utilisation fee for its unused £20m debt facility.  
It also has a healthy current ratio, and an enviable cash balance with no capital commitments. Performance metrics have been rising strongly. 

Against: It has poor asset cover, not surprising when its principal assets are its consultants. Its EPS yield is poor (3.3%) as is its return on equity (3.3%). Combined with a rich share price of £8.93, its PE ratio is also steep and unattractive to value investors. Revenue generation per £1 of share is a paltry £0.25. Its dividend yield is also nothing to get excited over at just 2.9%.

Conclusion: A cash rich but asset poor balance sheet, combined with a rich share price and poor earnings, make FDM an unattractive proposition for value investors.