Within small caps we hope to identify businesses that we can follow on the journey to becoming much larger over time. In this regard a key focus is on niche leaders with deep pools of opportunity. We have followed mining operations provider RPMGlobal (RUL) for some time. In our view the business has made solid progress in establishing building blocks for future success. We see RUL as a potential future inclusion within the ASX Model Portfolio.

Over the last 7 years, RUL has transformed its software business from a desktop to an enterprise solution for mine planning, scheduling, budgeting and execution. More recently, equipment maintenance and mine design products were added to the product suites.

RUL’s software integrates with Enterprise Resource Planning systems (predominantly SAP within miners), allowing master data – a single source of truth – between corporate and operations at mine sites. This enables efficient remote resource planning and coordination at various levels of a mining operation, ultimately saving time and money and reducing risk.

Figure 1: RUL mining software solutions across the enterprise
Source: RUL

With RUL’s product suite nearing completion, FY2020 will see a marked transition from a development focus to a sales and marketing focus.

Mining is known as an IT-laggard industry and miners have traditionally lumped software into their annual budgets. RUL’s strategies to increase adoption and smooth out its revenue profile are starting to bear fruit.

Firstly, although RUL’s enterprise solution covers the operational spectrum from mine design to budgeting to execution, RUL is able to sell by module to individual mine sites. 

Secondly, the company has refined a subscription sales model over the last 2 years to reduce the lumpy revenues associated with traditional license sales and improve sales conversion.

The product modularity and subscription model together remove key impediments to adoption, enabling RUL to execute a “land and expand” strategy: by mining company, by mining site and by operational division.  

We are seeing strong early adoption and there is potentially a long way to go. FY2019 finished with annual recurring revenue (ARR) from subscriptions of $4.3 million, up 230% on last year. 1Q20 saw ARR increase to $7.1 million, up another 65%.

Figure 2: RUL software division financials
Source: RUL

Although some of the uplift in subscriptions reflects moving perpetual license customers, the majority represents new business. We note that RUL will continue the perpetual license model in developing jurisdictions.

According to management, the software suite has approximately 3% to 4% product penetration across the coal, copper and iron ore verticals. With 1Q20 annual recurring revenue (maintenance and subscription) totalling $30 million, management’s product penetration estimates imply an addressable market well in excess of $1 billion. Given a narrow competitive field – RUL is supplanting excel based practices in several instances – there are good prospects for the business to capture the remaining opportunity as miners standardise processes to lift productivity.

At the time of writing, RUL is capitalised at $170 million with $28 million of cash on the balance sheet and no debt. After accounting for its adjacent mining Advisory segment, we think the software business is materially undervalued at between 3 and 4 times recurring revenue. Considering software peers trade at 10 times revenue, we see a substantial payoff on successful execution.