A growing desire among organisations to outsource IT management and infrastructure is playing into the hands of managed IT services company Redcentric (RCN), allowing it to move away from lower-margin hardware sales into more profitable and predictable service business. Redentric is supporting growth by snapping up rivals and looks well set to continue on the acquisition trail following the agreement of a new debt facility.
- Strong sales and profit growth
- High recurring revenue
- Shares are attractively rated
- Small but growing yield
- Rising debt
- Calyx first-half loss
Redcentric, which was spun off from IT infrastructure group Redstone in early 2013, is cashing in on growing demand from medium-sized organisations keen to avoid the costs, complexities and security risks of managing their computer servers and networks. The company focuses on winning multiyear contracts for higher-margin services - such as remote data storage, cloud applications and video conferencing - which it provides through its four UK data centres. The upshot has been strong sales and profit growth, rising profitability and an increase in the proportion of its revenues that are recurring in nature, which accounted for more than four-fifths of the total in the six months to 30 September.
The group's strategy, together with the £12m takeover of peer Calyx last April and strong demand for additional services from existing customers, fuelled double-digit growth in both recurring and service revenues in the first half. Moreover, strip out integration costs and Redcentric's adjusted cash profits leapt 17 per cent to £11.8m. It also inked several multi-year contracts, including a £4.5m deal with a central government department and a £1.1m assignment from radiology reporting specialist Medica to offer rapid, secure, 24-hour access to radiology and imaging reports to the majority of the nation's NHS trusts.
Those wins helped to bolster the group's six-month sales pipeline by a fifth to a record £85m. Importantly, the group is also doing a good job at holding on to existing clients as it wins new ones, with a churn rate running at below 5 per cent.
The growth Redcentric has achieved has not come for free. At the end of the first half, following a £12m cash outflow from the Calyx acquisition, £3.4m of capital expenditure and £2.2m of acquisition integration costs, net debt rose from £7.2m at the year-end to £20.1m, or £16.5m excluding finance leases. That's a sharp jump in debt, but broker FinnCap expects cash generation to get net borrowings down below £10m by the end of the financial year, excluding finance leases. Moreover, management recently secured a £70m debt facility that provides ample headroom for borrowing and gives it plenty of firepower to pursue further acquisitions in the fragmented managed services sector.
| REDCENTRIC (RCN) | ||||
|---|---|---|---|---|
| ORD PRICE: | 190.5p | MARKET VALUE: | £277m | |
| TOUCH: | 190.3-190.5p | 12M HIGH / LOW: | 199p | 136p |
| FORWARD DIVIDEND YIELD: | 2.6% | FORWARD PE RATIO: | 17 | |
| NET ASSET VALUE: | 64p* | NET DEBT: | 22% | |
| Year to 31 Mar | Turnover (£m) | Pre-tax profit (£m)** | Earnings per share (p)** | Dividend per share (p) |
|---|---|---|---|---|
| 2014 | 58.3 | 7.2 | 7.9 | 1.0 |
| 2015 | 94.3 | 15.5 | 8.1 | 3.5 |
| 2016** | 108.8 | 19.4 | 10.1 | 4.5 |
| 2017** | 116.7 | 22.0 | 11.3 | 5.0 |
| % change | +7 | +13 | +12 | +11 |
Normal market size: 10,000 Matched bargain trading Beta:0.22 *Includes intangible assets of £92.5m, or 64p a share **N+1 Singer forecasts, adjusted PTP and EPS figures | ||||
