As a global leader in private wireless
network solutions for the energy sector and industrial applications, Redline
Communications Group Inc. (TSX: RDL) is entering 2022 on a high in sales
backlog and gross margins, which both help to improve its profitability
outlook. The stock becomes one of Investorfile’s Top Ideas.
This Company is not new to
Investorfile, as we have been monitoring the business developments of Redline
Communications Group Inc. Inc. for many years now. But, it is only now that we
feel that the Company’s stock is at an inflection point because it is trading at a price that provides good entry value
for a small cap wireless stock (that has exposure to the energy sector) and
also has a new CEO with a fresh outlook. Hence, Redline Communications Group Inc. has become one of Investorfile's Top Ideas - Small Cap Value.
Based in Markham, Ontario, Redline Communications Group
Inc. (TSX: RDL – C$0.70) provides wireless products and service solutions to
customers which have very demanding requirements. Such customers rely heavily
on its wireless network to deliver high-performance and secure communications
over extended periods of time. As such, they require supplemental networks,
which will allow the end-user in industrial, government and enterprise markets
to operate their own private wireless networks independently, separate from
public commercial wireless networks for optimal performance and without the
concern of network security.
Today, in critical industries such as public utilities, oil & gas, mining, logistics
and transportation, there is a digital transformation journey occurring,
integrating information and communications technology with the current
infrastructure. This integration transforms the current industrial infrastructure
into a "Smart” infrastructure of operational technology. But, to ensure the
successful integration of wireless communications systems into industrial
infrastructure, the wireless communications systems needs to be
"industrial-grade,” which are purposely built to be safe, 100% reliable,
secure and cost-effective.
Redline Communications Group
(Redline) develops industrial-grade
wireless communications products and solutions. For over a decade, Redline has
demonstrated that its products are best-of-breed technology by being some of
the most powerful, versatile, reliable and secure wireless systems in the
industry. The Company says its products and services create the communication
foundation necessary to deliver enhanced applications and services for its
customers. Redline solutions enable reliable and mission-critical voice, data,
video, Machine-to-Machine ("M2M”) and Internet of Things ("IoT”) applications,
anywhere people and machines might be located, including very remote
communities or hard-to-reach areas.
At the root of the Company’s offerings are two
complementary radio technology families: Virtual Fiber and iLTE.
award-winning Virtual Fiber consists of wireless access products that are built
for extreme reliability and performance. The Company says these products can be
used in the toughest environmental conditions, rated to operate between -40° to
+75°C for fixed point-to-point and point-to-multipoint communications and
nomadic applications. Redline says it provides secure and reliable high-speed
connectivity in these challenging, isolated locations, and over rough non-line-of-sight
terrain. These are available in a wide range of frequency bands and channel
Redline iLTE is a comprehensive suite of
private LTE (the standard
for wireless data transmission)products
and services that combine to deliver security, flexibility, scalability and
durability to the mobile network. It is meant for
industries that require their own private wireless networks to operate
independently and separately from public commercial wireless networks, and they
are designed to cost-effectively optimize and modernize the way they
connect and transmit data to conduct their businesses.
The Company also adds to its advanced technology support
for its customers and partners by providing professional services for network
design and planning.
Today the Company’s core markets
include customers in Oil & Gas, Mining and Utilities, but it also supplies to
other markets such as telecom service providers, military, governments and
For Oil & Gas companies, Redline is providing
real-time, high-performance on-shore and off-shore wireless solutions. For
underground mining applications that require high performance, secure and
reliable communication infrastructure, Redline is serving this market with its
private industrial LTE (iLTE) network solutions.
Electric utilities are another
significant market for Redlines’s wireless solutions. The beginning of
demand-based metering, wind and solar production that fluctuates significantly
based on weather is contributing to the need for advanced monitoring and
control. This large-scale transformation is generating a significant need for
IOT sensors, smart metering, and control and automation systems, and Redline is
helping utilities companies build the wireless networks necessary to connect
In September of 2021, Redline
recruited a new CEO, Richard Yoon, to lead the Company to accelerate growth and
implement a new sales and marketing structure. To our understanding, his vision
is to position Redline as a solution provider for generating data within its
key markets and, as such, package the Company’s products with an array of
service offerings in order to become a long-term solutions provider for its
According to a Company news release, Mr. Yoon has 30
years of executive management experience, during which he successfully led businesses to accelerated growth and
increasing shareholder value. Just prior to joining Redline, he served as CEO
of ZTE Canada, a global leading manufacturer of network and terminal equipment
in the wireless telecommunications market.
Based on the last closing price, Redlines’s stock can be purchased for about C$0.70 per share. This stock price
equates to current market capitalization of approximately C$15 million on a
diluted basis. At this share price, the stock trades at about 65% of its
trailing 12-month (TTM) revenue on a currency-adjusted (US$1 = C$1.25) basis.
Listed on the TSX, the Company’s shares trade in Canadian
currency but all financial results are reported in US currency.
Investorfile expects that
Redline will report revenues of around US$19 million when it releases its 2021 annual
results next month. We acknowledge this will indicate little or no growth when
compared to 2020. We attribute the lack of revenue growth last year to the
headwinds in the Oil & Gas market that it serves, which was persistent
throughout most of 2020 and throughout the first half of 2021. However, since
then, the headwind in the energy markets has become somewhat of a tailwind,
which is just beginning to be reflected in Redline’s financial results moving
There are several emerging
trends that the Company has highlighted in the last filing of Management
Discussion and Analysis (MD&A) prepared on November 11, 2021 as it relates
to recent financial performance; revenues have increased the last three
quarters, gross margins (66%) are at their highest levels in many years,
adjusted EBITDA loss is at the lowest point since 2019. These trends suggest
that the Company is nearing an inflection point to becoming EBITDA positive.
At Investorfile, we have concluded that,
despite the recent stock market volatility, Redline Communications is a
compelling investment story with high-growth potential. The resurgence in, and
the Company’s exposure to the Oil & Gas market, has some influence on our
recommendation to buy this stock at this time. But is only one of many reasons.
We note over the last six months that the Company has publicly announced a
multitude of significant contract wins, for its RDL-3000 Virtual Fiber solutions from major Oil
& Gas, Mining and Telecom customers operating worldwide.
Investorfile is recommending that, value-wise, small cap
investors should begin accumulating the shares of Redline
Communications Group from its current trading levels up to a stock price of
C$1.00. At C$1.00 the Company would have a market capitalization valuation of
about C$21.4 million, which accounts for the potential dilution from the Company’s
outstanding warrants. At this level, the shares still trade at a multiple which
is less than one-time annual revenues expected for 2021. We anticipate that
annual revenues are will be noticeably higher in 2022 and beyond. Last reported
in Q3 2021, the Company had a sales backlog of about US$12.5 million.
Given the current financial trends, we
forecast that Redline will begin earning positive adjusted EBITDA margins
sometime in 2022. This is based on the higher sales volumes, coupled with the
higher gross margins the Company is currently achieving. Looking forward to
2023, we estimate that Redline adjusted EBITDA margins will hit 8% on revenues
of about $US28 million (C$35 million).
With the above
analysis in mind, small cap investors who begin to accumulate a stock position
in Redline at an average cost base of about C$0.85 (which is the average
between the current stock price and our accumulation target of C$1.00), are
only paying an Enterprise Value (EV) to EBITDA multiple of about 6.5 times
based on our outlook for 2023. This valuation is still very reasonable. That
said, we feel our forecast for next year's revenues and EBITDA margins are
As of September 30, 2021, the Company
had US$3.8 million in cash and no debt on the balance sheet. Although cash flow
from operations was negative for the nine months reported in 2021, it was
positive in its last quarter.
the last financial report filed, Redline entered into a three-year C$7 million
term loan credit facility with an institutional investor. In relation to the credit
facility, there was a total 4,170,500 warrants issued. Each warrant is
exercisable for one common share of the Company for a period of three years in
one-third increments at exercise prices of C$0.65, C$0.75 and C$0.85. The
potential dilution from the exercise of these warrants has been already
factored into our projections.
We acknowledge that due to some recent changes in senior
management and directors, insider ownership by this group as a whole is still small,
but we expect that this ownership percentage will increase throughout the
Based on our research, institutional investor ownership
in Redline shares is high. In the most recent public filings available, its
shows that Pender Fund Capital Management owns 19.2% of the Company's
outstanding shares and Perlus Investments owns 11.7%. We believe there are also
several other funds with just under 10% ownership each.
If you include the potential dilution
from the outstanding warrants, Redline Communications Group has approximately
21.4 million shares outstanding.
Company website: www.rdlcom.com
Ownership Disclosure: TSX: RDL - Yes
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Investorfile.com is not engaged in an investor relations agreement with Redline
Communications Group Inc. nor has it
received any compensation from Redline Communications Group Inc. for the preparation or distribution of this
The author of this article has acquired and may trade shares of Redline
Communications Group Inc. through open market transactions and for investment