Redcentric – this current year, to the end of March, could see both profits and earnings more than treble, the shares are now just 116p, brokers TP 190p

21.02.2025

After having had a bid approach last Spring, from one of Europe’s leading Cloud Computing groups, which came to nought, this group’s shares offer investors some useful upside.

The Business

Founded in 1997 and floated on AIM in 2013, Redcentric (LON:RCN) is the Harrogate-based group whose business is that of an information technology (IT) service provider.

It is a digital transformation partner offering cloud, communications, network, and cyber security solutions. Its managed network service solution offers a comprehensive suite of networking solutions expertly managed and closely monitored.

Its services include connectivity, software defined wide area networking (SD-WAN), local area networks (LAN), managed WAN, secure remote access, and others.

The business offers array of meticulously managed cloud services encompassing migration, optimisation, security, and ongoing maintenance of cloud infrastructure.

The group’s range of services include cloud consultancy, infrastructure as a service (IaaS), azure, AWS, hybrid cloud, cloud migration, modern workplace 365, platform-as-a-service (PaaS).

Through its communications services, it offers services in hosted IP telephony; unified communications; omni-channel; sip trunks; call recording, and call reporting.

Management Outlook

At the time of the Interim Profits being announced on Wednesday 20th November last year, the then ‘soon to be departing’ CEO Peter Brotherton stated that:

"H1 FY25 marks the first reporting period to fully reflect the benefits of the investments made in FY22 and FY23.

With the energy market returning to more normalised conditions, combined with the positive impact of energy conservation and integration measures implemented in FY24, the company has delivered strong financial results for the six months.

The key performance indicators illustrate the solid progress achieved.

Additionally, ongoing cost efficiency initiatives, both recently completed and currently in progress, are set to remove an additional £2.6m from the cost base on an annualised basis.

Looking ahead, we anticipate valuation clarity and definable improved profitability from the strategic decision to separate reporting and implementation of growth initiatives to the core two businesses: Data Centres (DC) and the Managed Service Provider (MSP) business."

The Equity

There are some 159.51m shares in issue.

The larger holders include Kestrel Investment Partners (20.62%), Lombard Odier Asset Management (17.31%), UBS Securities (16.10%), Slater Investments (11.43%), Harwood Capital (10.97%), Butterfield Bank (Guernsey) (10.54%), UBS Asset Management (5.27%), GoldenTree Asset Management (3.94%), Chelverton Asset Management (3.35%), Maitland Asset Management (3.35%), Stephens Group (2.01%), Killik Asset Management (1.66%), Brewin Dolphin (1.37%), and Integrated Financial Arrangements (1.35%).

Broker’s View

Analysts Andrew Darley and Kimberley Carstens, at Cavendish Capital Markets, have a 190p a share Target Price on the group’s shares.

They reckon that with the separation of the two businesses within Redcentric (the datacentre business and the managed service provider), and the establishment of a discrete management team for the datacentre business, the group remains poised to demonstrate the sum of the parts whether through clarity in disclosure, or through disposal.

The full year to end-March 2025 is set to demonstrate the benefits and value-add of the 2022 & 2023 datacentre acquisitions and their subsequent challenging integration, which they maintain that only Redcentric could have done.

For the current year to end-March they estimate revenues of £174.4m (£163.2m), with adjusted pre-tax profits of £13.6m (£4.2m), earnings of 6.2p (1.9p) and paying a 3.6p per share dividend.

For the coming year the analysts look for £183.2m revenues, £17.2m profits, 7.9p earnings and a maintained 3.6p per share dividend.

The year to end-March 2027 could see £192.3m revenues, £21.7m profits, 9.9p earnings and that 3.6p dividend.

My View

So far, my last September set Target Price has proved wide of the mark.

In May last year they were trading at 159p, that was on the back of an approach from WIIT, which is one of the leading European players in the Cloud Computing services market.

In early June it announced that it was not intending to bid for the company.

After eventually falling away to 104p last October, the group’s shares recovered to 130p a month ago.

They are currently 116p, at which level I view that they now offer risk-tolerant investors the opportunity of some useful upside, especially based upon the analyst valuations.

It is well worth bearing in mind that other bidders may be lurking.