Redcentric LON:RCN, the IT services company based in Harrogate, North Yorkshire will publish its results on Wednesday (19th July).
The IT services and cloud company was founded in 1997 and listed on AIM in 2013 and operates across 11 locations including eight data centres and employs more than 500 people. The company has grown aggressively through a strategy of targeted acquisitions, funded through the group’s strong cash-generation ability, and has used its increasing scale to provide the momentum and impetus to growth.
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The company completed five acquisitions in the last two years, and the revenues of Piksel, a cloud computing and IT security outfit; its newly-acquired 4D data centres; and two data centres it acquired from Sungard, which went into bankruptcy in 2022, will be rolled-into this year’s results.
Digital transformation
The company is an enterprise managed service provider, delivering network, cloud and consultancy services to public and private sector clients. The firm specialises in digital transformation and works closely with NHS Trusts. The company also offers data protection and storage and cyber-security consultant and will parachute a team into an organisation to deal with its IT infrastructure problems.
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A managed service provider is a third-party IT provider that remotely manages, monitors and maintains an organisation’s IT infrastructure and end-user systems. These range across a number of IT services such as network, voice applications, infrastructure and security, allowing clients to consolidate their IT services into a single point of contact.
Redcentric has over 90% recurring revenue activities. Private sector clients include Howdens LON:HWDN, Hays LON:HAS, and HCRG Care Group (Formerly Virgin Care which was acquired by Twenty20 Capital Group), which runs community-based intermediate care centres across the UK on behalf of the NHS.
In its last trading update, published in April, Redcentric said it was expecting revenues of GBP141.8m, up 52% from 2022 with an adjusted EBITDA of GBP24.8m, up 4.6% from the previous year. However, acquisitions in the IT space (even distressed assets) don’t come cheap, and the nature of Redcentric’s business is very energy-intensive and it had GBP1.7m more to pay for electricity in 2022. As a result, net debt ballooned from GBP1.5m in March 2022 by 2,266%, to GBP35.5m, which in the current interest rate cycle must be really painful. The Sungard transaction also came with an extra GBP1.5m annualised software cost because the American business did not record platform usage accurately and under-reported license consumption prior to the acquisition.
Power costs
The company has tried to mitigate the impact of its electricity bills forward-buying energy to reduce commodity price risk until April 2024. However, in two of its centres, it has no control over the purchase of energy and has been locked in, but at a higher unit rate than it had been able to achieve itself with its other data centres, leading to GBP900,000 of additional costs that it has been unable to pass onto its clients.
Redcentric is an interesting business (if you find data centres and IT security services interesting) in that it has a very disciplined approach. Longer term the Sungard acquisitions will start to pay back their worth and are already contributing 48% of top-line growth in FY23. The share price has performed better than in 2022, but FinnCap analyst, Andrew Darley thinks that there is still some way to go as the value of the acquisitions starts to pay through to Redcentric’s earnings.
Brave acquisition strategy
Darley thinks that Redcentric’s acquisition strategy has been punchy and brave, but that the market as a whole is on a bit of a downer on the whole managed services sector. He said: “The subsector remains one typified by low organic growth, but high cash generation. We expect 2023 to present a market focus on margins and cash, where Redcentric’s track record is very strong – but this is not a stock for software style top-line growth.”
The share price should eventually get some love, if Redcentric can integrate the new additions to the core business. The company – a smallcap and in its sector midmarket provider – could also become a tasty addition to bigger competitors itself as the managed service provider market continues to consolidate.The company opened trading at 129.7p on 14th and has offered a 0.6% year-to-date return and a 6.5% one-year return, with its shares ranging between 100p and 144p over a 52-week period.
The company has an GBP200m market capitalisation.
Bridgewise rates Redcentric as a ‘Hold’. The analyst said: “Redcentric published its Q3 report on Dec 8th, 2022, with positive results, but no significant factors particularly remarkable relative to its peers. We do believe, though, that macro-related market conditions will influence its performance more significantly than its individual results. Therefore, they earned a total score of 72 out of 100 and a ‘Hold’ recommendation.”
