FDM Holdings

FDM sources, trains and places IT & business consultants, known internally as “Mounties”. The FTSE 250 company operates in the UK, North America, EMEA and APAC. Founded in 1991 the business floated on AIM in 2005 but was taken private in the wake of the financial crisis. The company was re-floated in 2014. 

FDM specialises in a range of business & IT disciplines including development testing, IT service management, Project Management, Data Services, Business Analysis, Business Intelligence and Cyber Security.  The company hires graduates or ex-forces personnel and, via a training period of up to 16 weeks, seeks to bridge the required gap between academia and real-life work. They have training academies in London, Leeds, Glasgow, New York, Virginia, Toronto, Frankfurt, Singapore and Hong Kong with a combined training capacity of over 800 seats.

Strategy

FDM has a strong reputation as a graduate employer, consistently winning recruitment awards every year. They have partnerships with hundreds of universities providing a link to graduates. During 2017, FDM held over 600 graduate recruitment events at over 400 universities. This attracted 81,000 applications in the year. Of these, FDM accepted and trained 1,626 – a 2% acceptance rate. This abundance of applications allows FDM to choose graduates that fill the roles best & take on additional staff when demand warrants.

The standard training programme involves a 3-month training period and looks to combine technical education with industry standard certificates. Almost all training material IP is owned by FDM having been developed in-house over its nearly 30 years of operating.

Once training is completed, Mounties are selected by clients via an interview, and work on site for the client until they are no longer needed. Clients have to give a 1 week notice period before returning a Mountie to FDM. An impressive part about FDM’s model is their ability to consistently place a growing number of Mounties with blue-chip clients, and for those individual clients to take on an increasing number of mounties – shown in the below image. This has been a trend for almost 30 years.

Economics of a Mountie

As mentioned above, mounties receive free training from FDM. In return, they are required to work for a minimum of 24 months or repay their training costs. They are paid between £20k and £25k pa, depending on location, and are charged out at an average of £60k per year. 

The average time spend on a client’s site is 19 months. FDM has averaged a utilisation rate of 97.8% since 2007, including following the months after the financial crisis. The lowest utilisation ever reported was 96.7%, in 2009.

Typically, mounties end up being employed by clients in a more senior role having gained company-specific knowledge. Frequently, their previous roles are filled by new mounties which helps sustain growth for FDM.

FDM has expanded its training academies to a capacity of over 800 seats. These seats can be used up to 3x pa meaning FDM has the capacity to train and place 2,400 mounties pa. In 2017, FDM had 3,170 mounties on placement with clients. New training centres are built on a client demand basis, with a focus in recent years on pop-up training centres. These centres utilise flexible working spaces and allow for far greater economics.

Financials & KPI’s

Revenue has grown at a fairly consistent 20% CAGR over the last 5 years. Margins have slightly contracted but are healthy at 19%. The company did have a significant amount of debt when it was taken private by a PE house in 2009, but this was repaid in its 2014 float and is currently debt free. Its cash generation is healthy at a conversion ratio of 80%.

These financials alone aren’t amazing, although there’s nothing that stands out as a red flag. However, if we look at their longer track record, we can see why the business has grown from a market cap of £20m to £1bn in 10 years. Revenues have grown from £50m to £230m at a rate of 15% CAGR and profits from £4m to £32m at a CAGR of 25%. Each year, including 2008 & 2009, has shown revenue and profit growth (although the business only grew 2% in 2009). 

Taking all this into account, the business ranks 20th on the MEL Quality Rank above On The Beach, Just Eat and CTS Eventim. 

Over the long term, margins have expanded from 8%. This is mostly due to the change in business mix. When the business first started, it was more of a traditional IT consultancy which placed experienced & expensive IT personnel with clients. The Mountie division was small but grew fast to make up 90% of revenues in 2017. The margins on mounties are much higher due to their low cost, resulting in the business deciding to focus solely on this area and is now phasing out the traditional consultancy business. This has resulted in overall revenue growth taking a hit in FY18, but mountie revenue growth was still healthy at 14%. 

Mounties placed on site have grown at a CAGR of 30% over the last 5 years, and grown every year since 2007 (earliest records I can find). As mentioned previously, the mountie utilisation rate has averaged 97% and revenue per mountie has averaged £60k pa – although this differs significantly based on geography. 

Over half of all mounties are based in the UK, while North America has a third and the rest are split between APAC and EMEA. The UK has grown at an average rate of 20%, North America by 50% and APAC by 70% over the last 5 years. 

FDM’s reputation, training academies and relationships with banks are all very difficult to replicate. Their knowledge and ability to supply labour in niche areas of technology development mean the company has a defendable edge. They give plenty of KPI’s and have a global structural driver in terms of IT spend. The financial performance has been excellent and, as long as IT spending continues to increase at a modest rate, they should do well. We feel this is will be a good long term investment.