Instead of gambling on highly speculative propositions such as Bitcoin, the price of gold and the Sirius Minerals share price, I’d rather invest in a profitable company with a decent record of trading, such as Redcentric (LSE: RCN).
The shares look perky today on the release of the IT managed service provider’s half-year results report for the period to 30 September. The figures have been affected by the adoption of IFRS16, which alters the accounting for leases. So Redcentric has provided alternative, pre-IFRS 16 figures for comparison and I’m using those today.
Driving out costs
Revenue declined by 9% compared to the equivalent period last year, adjusted cash from operations dropped by 6%, and adjusted earnings per share shot up by 31%. Net debt declined by 27% to £16.5m. That’s quite a mixed bag of figures, but the directors had no hesitation in slapping 108% on the interim dividend, which makes me think things are going well for the business.
Although revenue was flat in the first quarter it rose in the second quarter driven, the company said in the report, by “logo” wins and cross-selling. Profit margins improved because of cost reductions achieved at the end of the previous trading year. Meanwhile, the firm has been ploughing money back into the business and invested £1.5m in its national network and £1.5m in its infrastructure-as-a-service (IaaS) platform. The company reckons it now has “modern, resilient and scalable platforms and networks.”
During the period, the directors reorganised the product management and development teams, and there is a strategic review under way of the data centre and network portfolios. From the trading year to March 2021 onwards, the directors expect the review to yield annual savings of “at least £2.8m.”
Non-executive chairman Ian Johnson said in the report that there is “strong” visibility of future revenues and 90% of turnover is now recurring, which I reckon adds to the defensive, cash-generating nature of the enterprise.
A potential catalyst for acceleration in growth
However, there’s a cloud hanging over the firm because of an ongoing investigation being conducted by the FCA after accounting errors emerged at the end of 2016. New customers were added in the first six months of the current trading year, Johnson said, but the investigation is affecting the pace of new business wins.
Looking ahead, the directors are “confident” the business will continue to generate strong cash flows enabling it to return cash to shareholders via the dividend and through the share buy-back programme.
Meanwhile, City analysts expect both earnings and the dividend to advance by percentages north of 20 in the trading year to March 2021. And with the share price at almost 93p, the forward-looking earnings multiple stands at just over 15 and the anticipated dividend yield is around 3.3%.
I think the valuation is attractive given the growth on offer, and the business has the potential to gain further traction when the FCA investigation finally ends. I’m tempted to buy some of the shares.