Questor: this business grew 600-fold in 30 years. Can it pull off the same trick in future?

“We bought a stake in RPS in 1993 – it was one of my first investments,” he added. “The company had a market value of £10m at the time and Alan needed money for a deal, which we gave him one Sunday night. So we know the company well.”

RPS, then, has an impressive past. But what of the future?

When Hearne stepped down as chief executive he was succeeded by John Douglas, an Australian. Montanaro described Douglas as a “new broom”. Two new non-executive directors have also been appointed. “There has been a lot of change on the board, which can be unsettling for employees and shareholders alike,” he added.

Douglas has set about a radical restructuring of the company, which had made many acquisitions to reach its current form as a provider of services such as urban design and regeneration, assessing environmental impact and surveying.

“Companies that were acquired were left largely unchanged and were not rebranded,” Montanaro said. But in October last year the group said it would spend around £2m to rebrand the subsidiaries under the RPS name. A similar amount would be invested in IT and to improve the HR function.

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“All of these decisions seem sensible and long overdue,” the fund manager added.

But the plethora of differently branded subsidiaries was not the company’s only problem. RPS has extensive operations in the oil and gas industry and several acquisitions in this sector were made “at the top of the market at full prices”, in Montanaro’s words.

As the oil price fell in recent years, operations had to be scaled back and people let go. At their peak in 2014 the energy operations had sales of £176m but this figure collapsed to just £65m in 2017.

As a result of this setback, earnings have barely grown in the past few years. “RPS has been unable to complete earnings-enhancing acquisitions and remains subscale,” Montanaro said. “The dividend is unlikely to grow as cash is needed to invest in the business.”

As a result of the restructuring costs, earnings per share on an adjusted basis are expected to be flat in 2018 and 2019 at 17p. The shares fell by 30pc to 150p when the plans were announced. “We are now left with a decent, cash‑generative service business, trading at a price-to-earnings ratio of about eight and yielding about 6pc,” the veteran investor said.

“If things go well, it might actually become a really good service business. Barring a recession, earnings may be near their trough and the business should see progress as the operations improve.”

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He said debts were “modest” at about one year’s earnings on the “Ebitda” measure and the dividend was secure. Meanwhile, the share price is at lows last seen in 2008-09 in both absolute and relative terms.

“So RPS is an each-way bet: either it returns to growth and makes acquisitions in the US and becomes a much bigger business; or Douglas discovers that the task is too great or will take too long and sells it to private equity,” Montanaro added. “In his career he has done both of these things and he is someone we would back. He creates shareholder value.”

Last week RPS announced a small acquisition in Australia and said 2018 results would be in line with expectations.

“Investors will receive an attractive income while waiting to find out which route Douglas will take,” Montanaro said. “We rate the shares a strong buy with a price target of 250p.”

Questor says: buy

Ticker: RPS

Share price at close: 162p