A weaker than expected quarter has Industrial Alliance Securities analyst Blair Abernethy lowering his price target on Redline Communications (TSX:RDL), though the analyst still thinks there is significant upside in the stock.
Yesterday, Redline reported its Q3, 2016 results. The company lost (U.S.) $1.18-million on revenue of $5.2-milion, a topline that was up four per cent over the same period last year.
“Redline continues to execute on its strategy of market diversification supported by the ongoing development and marketing of our LTE product line, introduced in August, 2016,” said CEO Robert Williams. “We are encouraged by early feedback on both elements of our strategy and particularly from initial public safety pilots with LTE. When combined with the positive cash flow we expect from our rightsizing program, we believe that we are well positioned for profitable growth.”
Abernethy says Redline’s revenue fell below his estimate of $6.5-million and the company’s reported bookings of $4.2-million were well below his expectation of $9.2-million. The analyst says the third quarter has led to adjustments of his estimates and valuation.
“Post Q3, we are adjusting our revenue estimate for 2016 to $21.8M (was $25.7M) and $29.5M (was $35.1M) for 2017,” says Abernethy. “Our EBITDA estimate for 2016 moves to $(4.2)M compared to $(3.8)M and our 2017 estimate changes to $2.2M from $2.4M. Along with trimming our estimates we are decreasing our 12-month target price from C$3.25 to C$2.75. Our target is based upon a blend of our EV/Revenue and discounted cash flow valuation approach. We see Redline as attractively priced at 0.5x EV/Revenue (2016E), compared to other communications equipment providers typically at 1.0-1.5x EV/Revenue, and see additional potential upside to our estimates from faster-than-anticipated rollout of pilot projects and potential product line extending acquisitions.”
Abernethy today maintained his “Speculative Buy” rating on Redline, and his new $2.75 price target implied a return of 89.7 per cent at the time of publication.