Whitman Howard Analyst Andy Smith caught up with DirectorsTalk for an exclusive interview to discuss Redstoneconnect PLC (LON:REDS)
Q1: Now Andy, Redstoneconnect announced the acquisition of Anders + Kern, what can you tell me about the rationale behind the acquisition?
A1: The rationale, we believe, is that it’s going to accelerate growth in its higher margin software division, this is a division which Redstone has been developing over the last 18 months and now, with the acquisition, it has another sales channel. As a result of this, we’re anticipating the margins to go from 3% in FY17, which has just recently been reported, to 7% by FY20 so all in all I think the rationale is to just to promote this higher margin product and at the same time, create shareholder value.
Q2: So, based on this news then, how has it affected your estimates?
A2: In terms of estimates, it’s a January year-end company so it’s a little unusual there so the year to January 2018, we’ve left our numbers unchanged, that’s on the basis that there will be increased development expenditure for OneSpace plus additional sales heads coming on board. The big change is in FY19 because in there we’ve increased our PBT by 19%, from £3 million just to £3.6 million so there’s a big increase there and also we’ve introduced our FY20 numbers for the first time into the market and anticipate £4.1 million in that year. So, putting that all together implies a 3 year CAGR of about 50% in the PBT so you can see that the growth is quite substantial within RedstoneConnect, and as a result of the transaction, we’ve increased the price target from 2.2p o 2.5p. I think the only point to note, or one point to note, is that the EPS we have bought that down a little bit on the basis of the number of shares that have been issued as a result of the placement which it has recently announced but at this moment in time, the shareholders are going to be more interested in growth rather than the PE rating of the company.
Q3: Now you mentioned the placing, it’s to raise £6.5 million, what will Redstoneconnect PLC be doing with the proceeds?
A3: They have indicated that £1.4 million of it will be going towards the acquisition cost itself and then the balance is going to be split between the development of Redstone, in that they need to develop some of the software to enhance the product, some of it going into working capital and some of it is going to be going into improving and increasing the sales team head count as they expand. I think some of the money is going to be used to strengthen the balance sheet and the company is on record saying it’s acquisitive and I don’t think we can rule out further acquisitions at this point.