The drive to digitize remote oil fields has helped a small Canadian tech company come back from the wilderness after being ostracized by investors for some accounting irregularities and an apparent bad choice of technology.
Redline Communications Group Inc., which sells wireless communications equipment for harsh, inhospitable areas where running fibre to deliver network solutions isn’t possible — oil fields, dotted with hundreds of wells and a handful of towers that need to share information, are a perfect target — was once a rising star on the TSX after its splashy debut in 2007. But it didn’t take long for the wheels to fall off.
When looking at North American technology stocks, investors overwhelmingly gravitate to the U.S., home to one of the largest listings of tech equities in the world. But while Canada might lack companies on the scale of an Intel or IBM, it still offers some world-renowned technology plays, as well as some tantalizing up and comers. More to the point for return-hungry investors, the S&P/TSX Capped Information Technology Index has gained 27.2% this year while the Composite Index is just about flat.
We take a look at five tech stocks that are worth keeping an eye on.
Continue reading.
The Markham, Ont.-based company, which was founded in 1999, seemed to have bet on a networking system technology called WiMax, which wasn’t getting much traction. The stock, $6.40 when it debuted on the Toronto Stock Exchange in the fall of 2007, was trading for less than 30¢ by the end of 2008 and it didn’t get much better.
Amid a company-led investigation into accounting irregularities, the stock was cease-traded in 2010. A class-action lawsuit followed (the company settled with no admission of liability) and Redline restated its revenues for four years.
But Eric Melka, who became chief executive in March 2010, cleaned out the management team, streamlined staff and cut costs. The company closed its WiMax business (though it still serves existing customers) and redesigned its proprietary broadband wireless product, bulking up its focus on software to increase margins.
Investors seemed to have noticed. Redline’s shares have gained about 45% over the past year and have been trading in the $6-range since January.
But it was only a little more than a year ago that Mr. Melka in March 2012 told the Financial Post he was working to regain the Street’s interest since all the analysts who had followed Redline had dropped their coverage in 2010.
The first analyst to initiate coverage was Byron Capital Markets’ Tom Astle in April 2012. He cautiously started with a “speculative buy” rating, writing he had finally found a new small-cap Canadian tech stock with “a differentiated technology, a solid business model and solid growth prospects.”
Even he recognized the tough job ahead. “Wait a minute, are we talking about REDLINE?? The same Redline that vapourized over $100-million into the WiMax equipment markets? Yup, that’s the one,” Mr. Astle said.
He noted that the company’s sales and distribution had been re-organized around four growing vertical markets, most notably oil and gas. While Redline also does work for military and public safety organizations, local and municipal governments and telecom service providers, half its revenues — which totalled $49-million in 2012 — come from its oil field business.
The company also does about 95% of its business outside Canada and earlier this year moved its chief operating officer to an office in the Middle East. About 140 employees now work at Redline.
“We’ve been able to have large oil and gas companies come to us and our networks are growing,” Mr. Melka said after Redline reported its year-end results at the end of March.
The company recorded $49.5-million in new bookings in 2012, with about 45% of those coming from its energy vertical. It reported adjusted EBITDA of $3.8-million, but posted a net loss of $9.5-million for the year.
Noel Atkinson, an analyst at Loewen, Ondaatje, McCutcheon Ltd., attributed the loss largely to a non-cash charge to earnings to reflect the current valuation of outstanding convertible debentures, which, he said, is “expected to largely go away in coming quarters.”
Mr. Atkinson is one of four analysts now cover the stock (Mr. Astle left Byron Capital in early April and his coverage ceased) and their general view is bullish — one speculative buy and three buy ratings — with one-year price targets ranging from $7.25 to $10.
But Redline’s CEO is still trying to drum up interest, visiting funds in Canada and the United States to make his case.
“You have to balance managing the business and talking to the Street,” he said. “We do a fair amount of ensuring that the funds and analysts see the growth.”