In a recent ShareCrazy.com (sign up for free here) review of HSBC Chairman Stephen Green’s book Good Value, it was noted how he explained globalisation has now passed the point of no return – the internet, in particular, seen as “spinning the threads of culture and commerce into the furthest corners of the world”. red24 is a play on this phenomenon as the company provides global security services to corporates and partners and with continuing security uncertainty across the world as well as attractive P&L, balance sheet and cash flow profiles and a lowly rating, its shares, at 7.75p, are a “buy”.

Company Description:

Founded in 2000, red24 is a security risk management and training provider. It operates from offices in England and South Africa, as well as having a presence in the United States and other areas of the world, and through two divisions;

red24 security – provides a range of preventative (e.g. intelligence and advice) and reactive (e.g. 24-hour emergency response service) solutions to help individuals and businesses avoid and manage security risks to themselves and their staff.



Training – accredited training courses for security managers.

Financials & Trading:

The company’s most recent results were for the six months ended 30th September 2009. Released on 5th November, these showed a 16.7% increase in pre-tax profit to GBP231,000 on revenue just over 16% higher at GBP1.87 million. Earnings per share increased from 0.39p to 0.43p and a maiden 0.15p dividend was also declared – which the company emphasised it aims to make “a regular part of shareholder returns”.


Before changes in receivables and payables (-GBP286,000) and debt repayment (-GBP130,000), the company generated GBP264,000 – with its cash flow facilitating GBP125,000 of the GBP130,000 of debt repayment to be the early repayment of loan notes. At period end the balance sheet showed net cash of GBP309,000, net current assets of GBP278,000 and net tangible assets of GBP414,000.


The red24 security business increased operating profit (before unallocated head office costs) by 12.7% to GBP426,000 on revenue almost 30% higher at GBP1.5 million. Whilst still robust, the profit growth was held back by two thirds of the additional revenue being at lower margin than budgeted and by the impact of the strength of the rand which has increased the costs of the company’s Crisis Risk Management Centre in Cape Town. However, the company noted the growth in the revenue stream for this segment “augurs well for the medium term prospects for the business”.


The training business saw more difficult trading conditions, though it remained profitable to the tune of GBP44,000 (against GBP51,000) as revenue fell by just over 19% to GBP368,000. However, it noted “overseas work continues to grow and prospects for the second half appear encouraging so that the year as a whole should turn out to be more profitable than last year”.

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Management:

Chairman Simon Richards is a Chartered Accountant with more than twenty years of experience in corporate management.

Managing Director Maldwyn Worsley-Tonks is a former Lieutenant Colonel in the British Army, with over ten years of experience in the security industry. He is a specialist in corporate contingency planning and disaster recovery.

Non-Executive Director John Mocatta, also a Chartered Accountant, has vast corporate finance and directorship experience.

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Bull Points:

– Increasing globalisation and security uncertainty


– Cash generative with positive balance sheet

– Post-results contract wins

– Total dividend yield of 4.1% should the 0.15p interim payout be repeated at full-year

Bear Points:

– High dependence on one or two key accounts, though the customer base is being broadened

– High dependence on key personnel

– Continuing strength of the South African Rand and mention of some margin pressures

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Recommendation:

The interim results put red24 on course to at least meet current year forecasts and news just over a week after those results of deals with two major insurance underwriters in the United States which are anticipated to “add a minimum of $700,000 of additional revenue over the next calendar year” suggest the forecasts should prove quite conservative. However, even on these numbers the current 7.75p share price represents an earnings multiple of 7.8 falling to 6. Considering this is a cash generative company which already has net cash and is expected to grow earnings by 30% in a year just 3 months away, this rating looks far too low.

Given the stated factors, even an earnings multiple of 10 seems unsatisfactory – though would suggest a pretty short-term target price of 13p. With this before mentioning that even if the 0.15p interim dividend is only repeated at the full-year stage, the overall dividend yield would be 4.1% (and with the spread on the share price not appearing too severe), red24 is a “buy”.

Key Data

EPIC: REDT
Market: AIM
Spread: 7.5p – 8p (6.25%)

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