Redknee Solutions has 153 per cent upside, says Cantor Fitzgerald Canada

Cantor Fitzgerald Canada analyst Ralph Garcea says he has a mixed reaction to Redknee Solutions’ (Redknee Stock Quote, Chart, News: TSX:RKN) recent financing announcements, but thinks the stock remains very undervalued.

Yesterday, Redknee Solutions reported its fourth quarter and fiscal 2016 results. In the fourth quarter, the company lost $14.7-million on revenue of $40.7-million, down from $59.8-million in the same period last year.

“Amidst ongoing delays in customer decisions across the BSS industry that have impacted our software licence sales throughout fiscal 2016, our focus on our near-term priorities delivered sequential improvement in our financial results in the fourth quarter, highlighted by positive adjusted EBITDA of $3.0-million,” said CEO Lucas Skoczkowski. “Importantly, our focus on working capital optimization and disciplined collection efforts contributed to the generation of $13.9-million in cash from operations before restructuring costs and an improvement in working capital. We continue to win new orders, which contributed to a healthy backlog at quarter-end of $175-million.”

Three days before the financing, Redknee announced that Constellation Software will invest (U.S.) $80-million (U.S.) in Redknee in order for Redknee to repay $53-million owed under its senior secured credit facility, and to finance restructuring costs and working capital needs.

Garcea wonders if there might have been a better deal to be had.

“While we are not fans of the deal structure/pricing, we do acknowledge the benefit of getting rid of the debt and having Constellation as a strategic partner for the long-term,” he says.

But with a deal now in the rear view mirror, Garcea says investors can now focus on Redknee’s fundamentals, which he says are improving.

“RKN continues to win impressive customers and displace competitors,” he says. “Backlog remains healthy and the Company continues to have a long-term objective of $1B in revenue and $200M+ in EBITDA, should it forge ahead as an independent. Fundamentals are improving.”

In a research update to clients today, Garcea maintained his “Buy” rating and one-year price target of $4.00 on Redknee, implying a return of 153 per cent at the time of publication.

Garcea believes Redknee Solutions will post Adjusted EBITDA of $16.2-million on revenue of $170-million in fiscal 2017. He expects these numbers will improve to EBITDA of $26.9-million on a topline of $185.1-million the following year.

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