The half year result posted by Rungepincockminarco Ltd (ASX: RUL) after the market close yesterday has given investors a lot to think about.
While the turnaround in the mining information technology solutions company is progressing, there are a few issues that are concerning.
Shares in Rungepincockminarco, the last ASX-listed IT consultancy that specialises in servicing clients in the resources industry (following the takeover of ISS Group Limited (ASX: ISS) and QMASTOR Limited (ASX:QML)) tumbled 8% to 56 cents in late trade.
Management was at great pains to point out the silver lining in its first half results even as net operating revenue fell 7% to $29.5 million and pre-tax loss widened to $2.9 million from $800,000 in the previous first half.
The company has been trying to transition the business away from advisory towards software licensing as resource clients cut back on spending in the wake of the commodity price slump.
Rungepincockminarco's respected management team is getting some success on that front with software sales jumping 17% (or $2.4 million) to $16.4 million for the six months to end December 2014.
Software now accounts for 56% of total revenue compared with 44% a year ago.
However, gains in software sales were not enough to offset the decline in its advisory business with that division reporting a 28% drop (or $4 million) to $10.4 million.
While there has been a marked improvement in operating earnings before interest and tax (EBIT), which came in at zero compared with a $200,000 loss from the previous corresponding period, this is very much due to the lower depreciation and amortisation rate and not operational improvements.
What is also concerning is the big drop in operational cashflow. There was a net outflow in cash from operations of $6.1 million, compared with a net cash inflow of $305,000 a year ago.
There is always some discrepancy between recognising a sale and collecting on it for IT consultancies, but the $10 million drop in receipts from customers between the periods is alarming and should be closely monitored.
At some point, the headwinds facing the business will abate significantly. We might already be seeing some early signs of stabilisation in the mining sector, which should facilitate spending on IT systems.
What's more, Rungepincockminarco's solutions improve productivity, an area of focus among miners.
Management should also be given credit for slashing costs and repositioning the business as operating expenses have fallen by more than a third in three years.
However, I would like to see some real signs of a turnaround before becoming bullish on the stock as I think the current share price already reflects a fair amount of good news.
