Redcentric is back on the path to growth

A new leadership team is working hard to re-energise the business
Thursday 07 Dec 2017 Author: Steven Frazer

There could up to 45% share price upside from Redcentric (RCN:AIM) over the next year, according to analysts. We share their bullish view.

While the IT and communications outsourcer has had a few troubles over the years, we believe there remains a very decent business in Redcentric. A new management team is making reassuring noises on cash flow, debt control and revenue stability; and so the £127m business can concentrate on growth once again.

Accounting fiasco

September 2016 saw black holes discovered in Redcentric’s books. Once the initial shock subsided and the dust settled the company was left with £14.9m of over-stated assets and an extra £12.5m of debt. That left investor sentiment, and the share price, in tatters.

Since then a significant overhaul of various business functions has been completed and a new chief executive and finance director are now running the show.

A Financial Conduct Authority investigation remains ongoing but we believe the decks have largely been cleared. And it is worth noting that Redcentric’s lenders have remained supportive throughout.

Cloud enabler

The overall strategy remains broadly the same. It helps small and mid-market enterprises free themselves from the complication and cost of running their own IT and communications teams by embracing cloud service platforms.

Redcentric is also expanding its customer base into the public sector with a focus on recurring, subscription-based revenues.

At the headline level, half year results to 30 September 2017 look lacklustre, with both earnings before interest, tax, depreciation and amortisation (EBITDA) and revenue pretty much flat at £9.1m and £51.4m respectively.

But on closer inspection there has been good progress. Net debt came in lighter than any forecast suggested (cut by £6.2m to £33.3m), EBITDA margins are back (17.7% versus 16.5% last year) and the operational cost base has been substantially streamlined, by about £2m a year going forward.

Stockbroker FinnCap estimates the company will earn an extra £1.4m pre-tax profit in the financial year to 31 March 2018, versus last year’s £8.5m, despite a likely sales decline.

Proper growth should be back in the following financial year with a forecast £104.8m revenue and £12.5m pre-tax profit.

That implies 6.5p per share of earnings, for an inexpensive forward price-to-earnings multiple of 13.2. What’s more, net debt is expected to be close to around one-times EBITDA, which could well mean the return of the dividend. (SF)

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