Redcentric PLC (LON: RCN) – Completed Health and Social Care Network Rollouts.

Redcentric PLC is an FTSE AIM All-Share Index listed IT managed services company founded in 1997 and headquartered in Harrogate, the United Kingdom. The Company’s divisions include Services, Recurring, Product, etc. The Services division provides installation or consultancy services and set up new services. The Recurring division provides data, connectivity, cloud, support services to customers under long-term agreements. The Product division sells third party products, including hardware. RCN offers Collaboration Services, Network Services, Applications Services, Infrastructure Services, Security and Mobile Services.

On 9 September 2021, RCN would conduct its Annual General Meeting.

Recent trend of dividend payments

  (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment by RCN from FY2019 to FY2021. In FY2021, RCN would pay a final dividend of GBX 2.40 per share. It would be paid on 17 September 2021 and had an ex-dividend date of 5 August 2021. RCN wants to follow a progressive dividend policy (50% of adjusted earnings) in FY2022 and beyond.

Technological trends and advancements

RCN, in FY2021, rolled out the Health and Social Care Network. It offers security services and products in its contract base as well as solid cross-selling opportunities. The Company also launched new services and products. Its new Call2Teams product enables its customers’ employees to make efficient calls using IP telephony from Microsoft Teams. The Company’s new secure access platform quickly became popular with customers who needed secure access to their mission-critical systems. RCN has completed its data centre and network rationalisation, which leads to strong savings. It has also launched its new enterprise resource planning system, which offers improved management information. Hence, it could support both organic and inorganic growth of the Company.

Growth Prospects

• Inorganic growth: RCN would like to follow the path of inorganic growth to add capability and scale to its operations. The management expects to complete at least one acquisition in FY2022.
• Significant investments: The Company made significant investments for its future growth. It has upgraded its Harrogate and Shoreditch data centres significantly, including the installation of new chiller units into the Harrogate data centre. It reduced electricity consumption and improved RCN’s carbon footprint.
• A high percentage of recurring revenue: The Company’s recurring revenue represents a very high percentage of total revenue. In FY2020, it was 89%, which increased to 90% of total revenue in FY2021.
• Launch of new products and services: RCN launched a new Call2Teams product and a new secure access platform in FY2021. Both have become very popular with RCN’s customers by fulfilling their urgent needs.

Key Risks 

• Disruptive technologies: Any disruptive product or service by a competitor could take away the market share of RCN, unless it continuously innovates and progresses as per the evolving customer requirements.
• Data security: Any breach in data security could damage the reputation of RCN. It could also hamper its future margins.
• High investment costs: The Company makes significant investments in its infrastructure and new products and services. It could lead to liquidity risk for RCN.
• Increasing competition: There is increasing competition in the sector due to the low barrier to entry. It could put pressure on profitability margins amid recessionary economic conditions.
  

Now we will analyse some key fundamental and shareholders statistics of Redcentric PLC

Financial and Operational Highlights (for the year ended 31 March 2021 as of 15 July 2021)

(Source: LSE Website)

• Due to the completion of the Health and Social Care Network, recurring revenue in FY2021 rose 5.5% YoY.
• RCN, in FY2021, completed the network and data centre rationalisation programme. It led to annualised savings of £4.0 million, exceeding expectations.
• RCN upgraded its Shoreditch and Harrogate data centres significantly, appointed financial advisers and strengthened its sales team by its continued investment for growth in FY2021.
• Driven by organic recurring revenue YoY growth of 5.5% and headline revenue YoY growth of 4.5% in FY2021, total revenue for RCN surged 4% YoY in FY2021.
• It resulted in adjusted EBITDA rising 19% YoY in FY2021. Furthermore, it resulted in adjusted cash generated from operations surging 35% YoY in FY2021.
• Driven by the impressive cash generation, net debt was down 55% YoY in FY2021.

 Share Price Performance Analysis

 (Source: Refinitiv, Research done by Kalkine Group)

On 20 August 2021, at 8:40 AM GMT, RCN’s shares were trading at GBX 134.00, up by 1.71% against the previous day closing price. Stock 52-week High and Low were GBX 158.00 and GBX 110.00, respectively.

On a daily chart, RCN's price is sustaining above 200-day EMA of about GBX 131.00 and 200-day SMA of about GBX 130.00, indicating the possibility of an upward movement.

In the last six months, RCN’s stock has delivered a positive return of ~8.88%. Also, it has outperformed the FTSE AIM All-Share Technology index with a return of about negative 0.41% and the FTSE AIM All-Share index with a return of about 3.83%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

RCN delivered a resilient performance in FY2021, with revenue rising 4% YoY and adjusted EBITDA surging 19% YoY. The management wants to pursue at least one acquisition in FY2022. RCN has reduced its net debt by 55% YoY in FY2021, indicating financial flexibility to raise further debt, if required, at a cheaper cost. It will help RCN to fund further investments for future growth. The Company could benefit from its inorganic growth strategy, its significant investments in infrastructure, products and services, its high percentage of recurring revenue and the launch of new services and products going into FY2022. The management has great confidence for FY2022 and anticipates establishing the Company as a market leader of IT managed services. In fact, RCN’s single operating platform and integrated network put it in a favourable position to achieve its strategic objectives.

Considering the significant investments, the Company’s new product and service launches, its high percentage of recurring revenue, the better profitability and leverage position of the business than the industry, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Redcentric Plc at the current price of GBX 134.00 (as on 20 August 2021 at 8:40 AM GMT), with lower-double digit upside potential based on 21.25x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

*All forecasted figures and Peer information have been taken from Refinitiv.

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from Refinitiv.

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