Cormark analyst Tse initiates coverage of Redline Communications with a $7 target

Redline’s foray into Wi-MAX, a wireless communications standard that was ultimately beaten out by LTE, was almost as big a money loser as Waterworld. A favourite actor puts out a stinker of a movie -we’re talking Waterworld bad here. Do you swear off his films for life, or give him another chance?

That’s the situation many seasoned Canadian tech investors are having with Redline Communications (TSX:RDL) right now. Redline’s Waterworld was its focus on Wi-MAX, a wireless communications standard that was ultimately beaten out by LTE. The miscalculation almost bankrupted the Markham-based company. Almost, but not quite.

Redline is now undergoing a more than solid 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. Melka refocused the company on a return it to its roots in providing broadband wireless equipment to niche markets. By developing what he calls a “software driven hardware platform” and stopping all Wi-MAX development, Redline instantly reversed its fortunes, turning a loss of $10-million in 2009 to a profit of $4-million the next year.

Cormark analyst Richard Tse says, like many investors, Redline’s history made him reluctant to take another look at the company. But when he did, he says, he found a company growing stronger by providing ruggedized wireless infrastructure solutions to lucrative niche verticals such as the oil and gas industry. Tse believes Redline can generate a steady annual revenue base of more than $60-million within the next two years, with the potential to double or triple that further out. In a report to clients this morning, Tse initiated coverage of Redline Communications with a BUY rating and $7 target.

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Tse says that while Wi-MAX put the company in the doghouse, its new focus puts the wind at its back. He says the company’s facilitation of mobile connections puts in smack in the middle of the machine to machine or M2M trend. He also notes that the $80-million that has gone into the company since its inception has left it with a valuable intellectual property portfolio of twenty patents granted or pending. The Cormark analyst says Redline could be attractive as an acquiree, but could also provide a catalyst with the execution of a transaction in the range of $10–20 million range.

Shares of Redline closed today up 5.6% to $4.75.

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