The market is overreacting to Redline’s CEO transition, says Byron’s Bhangui

The current selloff in shares of Redline Communications (TSX:RDL) instigated by the company’s announcement that CEO Eric Melka will leave in February of next year is simply an error, says Byron Capital analyst Dev Bhangui.

Melka, who guided Redline’s reversal of fortune since taking the top exec role in 2009, had been on medical leave for an ailing back. The company had been guided by interim CEO Robert Williams since August 8th, but now says it will undertake a formal search for a new boss.

Bhangui points out that since most of the company’s customers are overseas, the CEO must travel regularly, creating an untenable situation for Melka. He says those selling off Redline in recent days are missing the fact that, with a 2013 compound annual growth rate of more than 30%, this simply isn’t the same company that Melka took on four years ago. Today’s Redline, he says, is on a clear growth path and is well positioned for the future.

The Byron Capital analyst says Redline is now the dominant solutions provider to oil and gas majors and says the company is “on the cusp of a steeper growth curve”. He says Redline now has strength in management, a fiscally conservative culture, and an established position in its chosen verticals. Bhangui says he believes there is a real opportunity for Redline to move from provider of connectivity to data mining and optimization, a move that could mean a significant increase in revenue from existing customers.

In a research update clients yesterday, Bhangui reiterate our STRONG BUY recommendation and $7.50 one-year target on Redline. He notes that despite growing its revenue at more than double the pace of its peers, Redline is trading at 1.2 times estimates of 2014 earnings, while its comparable trade at 2.2 times earnings.

At press time, shares of Redline Communications were down 3.6% to $4.00.

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