RedstoneConnect Plc High margin growth strategy accelerated – Whitman Howard

RedstoneConnect Plc (LON:REDS) has acquired Anders & Kern for £1.4m and raised further funds to accelerate the development and market penetration of OneSpace. It has raised £6.5m at 1.5p, a 3% discount to the price on 8th May. We are leaving our FY18 PBT unchanged at £2.2m, but have increased our FY19 PBT forecast by 19% to £3.6m. For FY20 we expect a PBT of £4.1m implying a 3yr (2020-2017) CAGR for PBT of 49%. Moreover, we calculate the acquisition creates shareholder value with a ROCE of 30%. We increase our price target from 2.2p to 2.5p and maintain our buy recommendation with the company now trading on a PE rating of 16x and 12x for the year’s ending January 2018 and 2019.

OneSpace’s scale and development accelerated. Redstone has acquired Anders & Kern (A&K) a Systems & Solution integrator specialising in meeting room management and AV solutions. A&K will sell REDS existing OneSpace technology through its own distribution channels, so broadening the company’s network. A&K has already established a track record in the ‘meeting room management space’ and competes and wins against established players with a blue-chip client base to which the company now has access.

Acquisition funded by equity raising. A&K revenues for the period ended March 2017 were £3.4m with EBITDA of £346k. With REDS paying £1.4m for a 100% share, it implies an adjusted EBITDA multiple of 3x. The placement proceeds will fund the acquisition, accelerate the development of OneSpace, enhance the sales & marketing team, provide working capital and strengthen the balance sheet.

Further evidence of commitment to improve margins. A&K will support the margin expansion. With the Software division contributing an expected 27% towards the group’s adjusted EBIT by FY20 (0% in FY16), the adjusted EBIT margin is expected to rise from 3% in FY17 to 7.2% by FY20 – hence our continued optimism for Redstone.

Upgrading FY19 PBT. FY18 PBT growth estimate of 77% is unchanged to reflect increased development and sales costs arising from the acquisition, though in FY19 we have increased our PBT from £3m to £3.6m. With 433m new shares in issue, the FY18 and FY19 EPS will decline from 0.11p and 0.14p to 0.10p and 0.13p respectively.

1 for 100 share consolidation. The board is also seeking at the forthcoming AGM to seek shareholder approval for a 1 for 100 share consolidation.

Whitman Howard acts as joint broker to RedstoneConnect plc.

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