Redline Communications Group is undervalued, Echelon Wealth says

Following the company’s fourth quarter results, Echelon Wealth Partners analyst Gianluca Tucci remains convinced that Redline Communications (Redline Communications Stock Quote, Chart TSX:RDL) is a good buy.

On Wednesday, RDL reported its Q4 and fiscal 2018 results. In the fourth quarter, the company posted Adjusted EBITDA of $200,000 on revenue of $7.5-million, a topline that was down nine per cent over the same period last year.

“Redline ended 2018 showing revenue and bookings growth over last year. Healthy gross margins supported a profitable fourth quarter and a reduced net loss for the year as compared to 2017,” outgoing CEO Robert Williams said. “We are seeing increasing demand from both new and existing clients across multiple vertical markets and in multiple geographies for both our traditional RDL-3000 product as well as our more recently introduced iLTETM product line which we continue to roll out.”

Tucci characterized the quarter.

“While overall revenue was down 9% y/y due to a large offshore oil and gas deployment in Q417 that was not repeated, bookings and backlog showed solid growth and evidence of a revenue base in the coming quarter(s),” he says. “We expect book-to-bill to hover around 1.0x over the coming quarters with continued pressure on near term margins due to supply shortages in LTE fiber. In Q418, RDL received a $3M expansion order from a military organization in the Middle East for a Redline Virtual Fiber network to create a private network to connect all of their remote infrastructure. The majority of this order will be shipped in 2019. The Company noted it has 7 active pilots in oil and gas, 2 active pilots in mining, and 1 active pilot with a Canadian utility. The supply chain constraint for its virtual fiber line noted in early 2018 is still present and could impact gross margins in the near term.”

In a research update to clients today, Tucci maintained his “Speculative Buy” rating and one-year price target of $2.75 on Redline, implying a return of 66 per cent at the time of publication.

Tucci thinks RDL will post Adjusted EBITDA of $1.1-million on revenue of $30.7-million in fiscal 2019. He expects those numbers will improve to EBITDA of $3.0-million on a topline of $33.8-million the following year.