Redcentric’s turnaround is bearing fruit

Clear of previous hassles, operating on over 87% ARR and with recovering profitability, Redcentric shares have excellent upside potential, writes Mark Watson-Mitchell.

At the start of this month, Redcentric (LON:RCN) issued a trading update for the year ending 31 March 2021. It was more than encouraging.

At the same time, the company issued notice that it had sold off a non-core business unit to Thales UK for £5.75m, with £3.5m due for settlement at the end of next week, and the balance £2.25m at the end of September – both sums will help to boost the group’s finances.

It has the answer

The Harrogate-based company, which was founded way back in 1997, listed on AIM in 2013. It is an IT managed service provider, delivering highly available network, cloud and collaboration solutions that help public and private sector organisations to succeed.

With over 450 employees, it operates through six different locations and has multiple data centres in the UK, providing a 24-hours a day, seven days a week maintenance and support network.

A growing client list

The group has over 800 customers using its various services. 

Clients include Hays, Howdens, the NHS, the CBI, Virgin Care, Yo sushi, Devon Doctors, Black Pear Software, Teletext holidays, Thomas Pink, the Royal Air Force Benevolent Fund, The Salvation Army, VP, RIBA Architecture, West Berkshire Council, Best Food Logistics, University of Lincoln, University of Westminster, Evans Cycles, Coastal Housing Group, Bevan Brittan, West Berkshire Council, Proactis, Ascot, and the Cumberland Building Society amongst so many others.

Well-supported equity

There are some 156m shares in issue.

Larger holders include Kestrel Investment Partners (18.09%), ND Capital Investments (15.91%), Lombard Odier Asset Management (12.55%), Slater Investments (11.91%), Harwood Capital (11.65%), Chelverton Asset Management (5.20%), Artemis Investment Management (3.10%), Stephens Group Inc (2.05%) and Granite Associates (NY) (1.31%).

There is one private holder Richard Griffiths (5.50%) worth noting.

Cost-cutting in 2020

In the last year the group has undergone a process of cost-cutting measures – aimed at reducing such outflow by £2.8m, which the update informs us has actually been bettered to £4m of annualised savings.

Positive brokers estimates

Analysts Andrew Darley and Michael Hill at the house broker, finnCap, currently have earmarked the group’s shares for a rise to 170p.

They are estimating that revenues for the year to end-March were around £92m (£87.5m), with adjusted pre-tax profits coming in at £13.3m (£8.7m), generating 6.9p of earnings (4.7p), covering a 3p (0.8p) dividend.

However, I think that perhaps they are being too cautious in going for just £94m of sales this current year, profits of £14.8m, earnings of 7.6p and a 3.3p dividend per share.

Lovely ARR rates

Regular readers will know by now just how much I love to see companies, in the software and computer services sector, declaring their annual recurring revenue rates (ARR) – and at half-time Redcentric was showing a very healthy 87%. 

Couple that rate with ongoing operational economies and exponential gains can be created.

Figures due in two months

The finals will be released on 24 June, at which time I would hope that we will get even more positive news from the group regarding current year prospects and its objectives going forward.

The shares, which touched 158p just six months ago, closed at just 139p on Friday night.

My view

Until more is known from those results, I will go with finnCap’s target price of 170p.