Byron’s Tom Astle maintains Speculative Buy on Redline, lowers target slightly

A Redline Communcations RAS Smart Antenna System. The system extends reliable high-speed wireless connectivity to harsh environments such as oil fields.

Yesterday, Redline Communications (TSX:RDL)reported its Q2, 2012 results. The company earned $7.8 million on revenue of $17.3 million.

CEO Eric Melka said: “I am very pleased with this solid quarter. We had strong bookings once again and our backlog has grown to nearly $8-million,” adding: “We’ve been winning larger deals with new and existing oil and gas customers. These typically have longer roll-out periods, so our backlog has increased along with our revenues. This increase in backlog also provides better visibility into future revenue.”

Byron Capital analyst Tom Astle says Redline’s Q2 numbers are strong, but but contain lots of deferred and unusual items. However, he says, shipment, order and backlog numbers reflect a growing and now cash positive operating business. In a update to clients yesterday, Astle maintained his Speculative Buy rating on Redline, but lowered his price target slightly, to $6, from his previous target of $6.50.

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Markham-based Redline is undergoing a turnaround under CEO Eric Melka, who joined late in 2009 from Telemedia Ventures and has presided over a near clean sweep of the company’s business, management team and board. In 2008, Redline’s stock was hammered from more than $6 to pennies, as its move into the WiMAX space prove to be a disaster. Redline’s losses, particularly in 2008 when it was in the red by nearly $30-million, were staggering and ultimately forced the company upon on a restructuring that would return it to its roots in providing broadband wireless equipment to niche markets.

Astle says that while he sees a risk of volatility quarter over quarter, Redline seems to finally be out of the woods. The Byron Capital analyst says he expects revenue growth to continue, and the company’s current margin and cost structure should “significantly” drive the company’s bottom line. Astle’s target price is based on 15x the $.40 cents a share he sees the company capable of earning in fiscal 2013.

At press time, shares of Redline were up 1.5% to $4.10.

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