Cantor Fitzgerald raises target on Redknee to $5.25

Redknee’s (Redknee Communications Stock Quote, Chart, News: TSX:RKN) first quarter of full revenue contribution from its Nokia Siemens Network Business Support Systems acquisition hints at future success, says Cantor Fitzgerald analyst Justin Kew.

After market close yesterday, Redknee reported its Q3, 2013 results. The company earned (U.S.) $80,085 on revenue of revenue of $58.6-million, which was up 295% from the $14.8-million topline the company posted in the same period a year prior.

Kew notes that Redknee’s Q3 revenue number was below the street’s consensus of $61.8-million, but EBITDA came in well ahead of expectations, at $7.3-million (versus the street’s $2.9-million). Kew says the company’s EBITDA margin of 12.4% proves that the combined entities is instantly very profitable. The street had been expecting an EBITDA margin of 4.6%.

In a research update to clients this morning, Kew pared back his revenue outlook for this fiscal year, but raised his EBITDA margins significantly. As a result, he maintained his BUY recommendation, but raised his target on Redknee to $5.25, up from his old target of $4.50. His target is based on 9x his expectations for the company’s 2015 EV/EBITDA numbers, a multiple he says “compares favourably” with Canadian software companies as a whole.

Kew expects that Redknee’s revenue will climb to more than $255-million by 2015, powered by organic growth and the contribution from the Nokia Siemens acquisition. He thinks EBITDA margins will increase to around 9% as the two businesses become more fully integrated in the near term, then to the 15% range in fiscal 2014, and finally to around 20%, when the integration is optimized.

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