Redline Communications has a 58 per cent upside, says Echelon Wealth

Q1 misses and lowered expectations for the rest of the year are cause for a target price reduction on Redline Communications Group (Redline Communications Group Stock Quote, Chart TSX:RDL) from analyst Gianluca Tucci at Echelon Wealth Partners. In a Wednesday update to clients, Tucci maintained his “Speculative Buy” rating with the new target of C$2.50 (previously $C2.75).

Wide-area wireless network manufacturer Redline Communications released its first quarter fiscal 2019 financials on Tuesday, which featured revenues of $5.8 million, up a slight two per cent year-over-year and an Adjusted EBITDA loss of $0.8 million, a $0.5-million increase over Q1 2018. (All figures in US dollars unless noted otherwise.)

The $5.8-million top line was lower than Tucci’s forecast of $7.2 million, as was the Adjusted EBITDA loss of $0.8 million in comparison to Tucci’s $0.0 million. Tucci notes that Redline’s backlog decreased quarter-over-quarter from $10.1 million to $9.8 million, while bookings of $5.7 million came as a disappointment, says the analyst, as the reflect the lowest levels since fourth quarter of 2017, although Tucci looks for a rebound over upcoming quarters.

“We continue to expect lumpiness in quarterly performance as the expansion of its recurring revenue business grows in its infancy – Q119 witnessed the successful acquisition of 35 new Internet Service Provider customers, as part of Microsoft’s Airband Initiative. We believe new CEO Stephen Sorocky’s vision of focusing and enhancing recurring revenue elements will benefit investors over the medium-to-long term, however note this process will take time to mature into a material element of Redline’s business and continue to expect unpredictability in quarterly revenue; early results of this recurring revenue focus are encouraging,” says Tucci.

Taking into account the quarterly misses along with “modestly tamed” expectations for the rest of the year, the analyst has moved his fiscal 2019 revenue, Adjusted EBITDA and EPS forecasts from $30.7 million, $1.1 million and $0.04 per share, respectively, to $27.9 million, $0.1 million and negative $0.07, respectively.

Tucci estimates that RDL is currently trading at a multiple of 0.4x his calendar 2019 EV/Sales estimate, at 10.8x his EV/EBITDA estimate and at 29.4x his P/E estimate, which compares to its Global Telco Equipment comparables at 2.1x/12.7x/89.9x, respectively.

Tucci’s C$2.50 target represented a projected return of 58 per cent at the time of publication.