Redline Communications wins contract valued at 10% of its annual revenue

Oilfield deployments are a big growth driver for Redline, says Byron Capital analyst Tom Astle. On Wednesday, Redline Communications (TSX:RDL) announced it had been awarded a significant contract with an unnamed American oil and gas company. The company, which is already a client of Redline’s, will hire it to build for a high-capacity wireless network for communications between wells, drilling rigs, and its control offices.

Management says the project, which will begin immediately and could take up to a year and a half to complete, represents approximately 10% of its fiscal 2012 revenue.

“This contract is a major achievement for Redline and we are proud to have been selected as the network backbone for yet another oil field project with this customer,” said CEO Eric Melka, adding: “We work hard to demonstrate value for our customers, and when they select us for more deployments in more countries, we know that we’ve been successful.”

Byron Capital analyst Tom Astle says this contract is a material oilfield win for Redline. His estimates peg the company’s 2012 revenue at $52-million, so this contract alone will contribute more than $5-million to the topline, he believes. The news, says Astle, reinforces his view that oilfield deployments are a big growth driver and that the vertical is a key growth driver behind the new Redline wireless gear. In a research update to clients yesterday, Astle maintained his Speculative Buy rating and $6 target on Redline.

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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.

In it recently reported Q2, Redline earned $7.81-million (U.S.) on revenue of $17.4 million, an increase of 37% from $12.7 million in the same period in 2011. Astle says he was concerned about the seasonality of the company’s third quarter, but this week’s contract announcement has put that notion to rest. The Byron analyst says he continues to gain confidence in Redline’s business model, believing it will post earnings of $.40 cents a share in fiscal 2013.

Shares of Redline closed today down 1.5% to $4.75.

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