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.

Redline’s 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 sizes.

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 transportation.

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 these systems.

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 customers.

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 forward.

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 conservative.

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.

Subsequent to 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 coming year.

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

Author Ownership Disclosure: TSX: RDL - Yes

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This article is for informational purposes only. This article is based on the author's independent analysis and judgment and does not guarantee the information's accuracy or completeness. The information contained in this article is subject to change without notice, and the author assumes no responsibility to update the information contained in this article. The information contained within this article should not be construed as offering of investment advice. Those seeking direct investment advice, should consult a qualified, registered, investment professional. This is not a direct or implied solicitation to buy or sell securities. Readers are advised to conduct their own due diligence prior to considering buying or selling any stock.

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