Rebirth of Redstone? (RED)

As one of the former tech-boom darlings, is Redstone about to grow up and finally be a proper IT company that makes a profit?

All the promise of the tech-boom was never delivered by many companies but Redstone was a classic. Once trading at £10 or so a share in the early turn of the millennium, recently they have languished after share issues and dilution at a miserly 0.6p back in Sep 2010. I think Redstone has squeaked a profit of less than £1m on an occasion but the books look like they had to be massaged to achieve that. So an unmitigated disaster for the investors that put their cash into this one over the past 12 years or so. I think for that reason if you talk about Redstone to most investors, including me, the thought is - ’you have to be joking!’ and I wouldn’t blame anyone for thinking this.

However, when investors just don’t want to know, that’s the point at which stocks are often oversold imo. 2010 looks like the year when Redstone may actually become the real deal though, imo.

September 09 is the point where I see the possible kick start to Redstone’s recovery with the appointment of Stephen Yapp as an interim Chairman. A precursor to any poor company performance for me is a change in the board. Bad co’s don’t just become good co’s, it needs a new broom to sweep clean.

Redstone now has 3 divisions, Convergent Solutions, Managed Solutions and Fujin Systems - the recently acquired business. Yep, the words ‘solutions’, ‘tools’ ‘systems’ ‘protocols’ in abundance and it make my eyes glaze over as I don’t know what the individual things are but I know businesses spend fortunes on this stuff and it seems there’s a constant renewal and upgrade cycle that’s just getting bigger and bigger exponentially.

Two weeks later from Yapp’s appointment the FD had resigned - another good sign. He’d been with them 5 years and they had never performed in that time - whether he was part of the cause or not, a new FD is a positive sign imo. The interims which followed in Dec were not pretty and it was clear changes were needed here and big ones.

In August, Ian Smith and Tony Weaver were appointed to the board as non execs.

In August 2010 the co had an £8.5m fundraising through new shares and loan notes. Ian Smith became Chairman and Tony Weaver CEO. Between then they have taken a 15% stake in the company.

Reading up on these guys I get this:

http://www.channelweb.co.uk/crn-uk/news/1876171/smith-weaver-join-redstone-board-table

“Redstone has welcomed two acquisition behemoths to its board of directors.
In a statement to the London Stock Exchange today, the company signed up industry veterans Ian Smith and Tony Weaver as non-executive directors.
The pair, who have now stepped away from Avisen after it bought Xploite earlier this year, boast a combined 40 years experience in the IT and comms space, and are actively on the hunt for more acquisitions.

During their eight year reign of Xploite, the company racked up 26 corporate transactions including the sale of Anix to ACS, and returned £20m of cash to shareholders before the Avisen acquisition.
Stephen Yapp, executive chairman of Redstone, said in a statement: "We welcome Ian and Tony to our board, to which they will add considerable IT sector expertise. The board and I look forward to working with them."

Earlier this year Redstone vowed to return to profitability after posting a loss in the first half of its current financial year. The firm, which also sold its telecoms arm to Daisy, was the subject of takeover talks last year, which were later terminated.”

I don’t know much about these guys but they have a strong IT background and here they are described as ‘serial entrepreneurs’.

http://www.microscope.co.uk/news/reseller-news/redstone-ditches-boss-secures-new-funding/


That sounds a bit positive too imo.

Since taking charge these two have got to work selling off the low margin, non core businesses, reducing headcount and improving performance, focussing more on the now 3 main divisions. In H1 they were making an operating loss of just £0.5m and a pre-tax loss of £1.5m, big improvements. They have support from their bank, they’ve reduced debt by nearly £8m to £12m. Fujin Systems was partly owned by Smith and Weaver and this is the first of their acquisitions since taking charge

With the company now targeting high margin business it’s interesting that recently they have won 2 x £5m bank IT contracts and a large NHS contract.

In Feb the co said restructuring had been completed and they said this:.

“At the time of the Interim Results on 17(th) December, the Company described what action had been taken to restructure the business since September 2010, following the appointment of Ian Smith as Chairman and Tony Weaver as Chief Executive. The board set an objective to re-position the Company as a more focussed, higher margin business with reduced gearing. The Company would therefore be better positioned to deliver network based end-to-end managed services, technology and infrastructure solutions.
As explained in the Chairman's statement, following the restructuring process the residual businesses comprise predominately all the activities of Redstone Converged Solutions together with the connectivity and managed services activities of Redstone Managed Solutions and the recently acquired Fujin Systems business.
Moreover, the Board announced that it had commenced the final phase of the restructuring to consolidate all activities into a single trading entity branded "Redstone". The last element of this process was to re-align the residual cost base to reflect the restructured activities of the Company.
The Company announces that the restructure has been completed and that a new senior management team has been appointed to run the newly consolidated activities of Redstone. This final stage of re-aligning the cost base has resulted in the Company's headcount being reduced by a further 83 members of staff. This is in addition to the 172 members of staff who have either left the Group through recent disposals of businesses or who have been transferred to new owners under TUPE regulations. Redstone now has 442 P.A.Y.E members of staff.
Tony Weaver, Chief Executive, Redstone plc, commented:
"We are looking forward to devoting 100% of our time and energy on driving the business forward as a single entity. We have a strong pipeline of new business opportunities and the capacity to move quickly in converting these leads into profitable revenues.
I would like to thank the staff for their patience and diligence through this difficult period of restructuring. I would also like to thank those staff no longer with the Company for their service and contribution."

I like to look for four things in a recovery stock. Board changes, improving trading statements, a chart that is turning positive and directors buying shares as the forth part of the jigsaw.

Directors were buying shares on Jan 10th.

Ian Smith and Tony Weaver, despite their large holding were buying another 1.75m each @ 1.4p a share - £25K worth each.

Richard Ramsay, non exec, bought 3.5m shares @ 1.42p - £50k worth.

So three directors making decent purchases and a non exec making a £50k maiden purchase.

All in all with the board changes, the trading improvement, the positive chart and the director buys it looks to me that the ducks are lined up perhaps.

The market cap at a share price of 1.65p = £44m

Forecasts are non-existent from what I can find so what could Redstone potentially do going forward?

With a pre-tax loss of £1.5m in H1, a £1.5m profit in H2 would mean break even for the full year. That would be a huge improvement over the £10m loss they made last year. If they can make £1.5m in H2 this year (and this is a guess) then that‘s a £10m improvement and a move to profitability for a £44m co.

If they were to do £5m pbt in the coming year with a market cap here of £44m then the PE should be around 9 - I wouldn’t expect any tax to be paid on that profit in fact they might get tax credits as they have around £40m of accumulated losses on the balance sheet with should help offset tax and increase the eps in the coming years and help reduce debt further.

Again, these aren’t forecasts but an example of what might be achieved perhaps.

The back down to earth warning is that these are a penny share in the full sense of the word with £12m debt and a history of never making a profit so buyer beware - that means there is quite some risk too.



Year end is March 31.

Website:

http://www.redstone.co.uk/