M Partners analyst Shuttleworth says buy Redknee

Redknee CEO Lucas Skoczkowski. M Partners analyst Ron Shuttleworth says the company’s stock is undervalued relative to its peers. Last Wednesday, Redknee (TSX:RKN) reported its Q3, 2012 results. The company’s topline, which increased slightly from $14.2-million to $14.8 million was not the story, it was earnings. Redknee’s net income came in at $1.7-million versus a loss of $1.9-million in the same period last year.

“Our fiscal third-quarter results demonstrated our ability to grow with our customer base, continue to manage costs and improve operational efficiencies,” said Redknee CEO Lucas Skoczkowski, adding: “This is particularly evidenced by our EBITDA increasing 60 per cent to $2.5-million over the previous quarter, and especially compared to the year-ago loss. Our sales momentum continues to be encouraging, driving our order backlog to $55.8-million and giving us a clear pathway to profitable growth.”

M Partners analyst Ron Shuttleworth says Redknee missed his topline expectations, but more than made up for it with EBITDA and EBITDA margin results which far surpassed his estimates. He says the margin bump was likely the result of a recognition during the quarter of a “step-up” license, which is based on a client reaching a subscriber base threshold. Although these types of licenses are hard to predict, he says, Redknee is gaining more high growth customers and their frequency should increase. In a research update to clients Friday, Shuttleworth reiterated his BUY rating and twelve-month target of $1.70 on Redknee.

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Founded in the solarium of Skoczkowski’s apartment in 1999, Mississauga-based Redknee now boasts clients such as Microsoft and Cisco. The company’s billing solutions run the gamut from the customer side to helping service providers better monitor, understand and monetize their subscriber base. Redknee’s real-time converged billing solution has been benchmarked to support a quarter of a billion subscribers.

Shuttleworth says he believes very large deals, some worth as much as $10-million could be in the pipeline for Redknee. The M Partners analyst says now is a great time to accumulate shares because this potential upside is not built into the share price and the stock trades at a multiple that is below its peers.

Shares of Redknee closed today even at $1.15.

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