Stock broker FinnCap has restored forecasts on SME communications and IT services supplier Redcentric (RCN:AIM) after the company's accounting kerfuffle in November 2016. After crunching the numbers analyst Andrew Darley has slapped a 117p target price on the stock, roughly 26% up from the current 93p level.

That price target is based on the rough 10-times EV/EBITDA (enterprise value to earnings before interest, tax, depreciation and amortisation) exit value of SME peer Alternative Networks, which was recently taken over by private equity-owned industry consolidator Daisy in a £185m deal.

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'The extent of the accounting misstatement has already been quantified at £20.8m, of which £5.9m related to the interim period ending September 2016, relating to accounting practices, policies, and errors regarding cost accrual, cost deferral, and revenue recognition,' explains Darley today.

Forecasts restored

'Having withdrawn original forecasts with the initial revelations, we reintroduce amended forecasts, assuming that the forensic accounting investigation has uncovered the issues, and having been corrected, that second half 2017 performance (to 31 March) continues to replicate performance in the first half (to 30 September 2016), as management guidance indicates,' the analyst continues.

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FinnCap's latest forecasts

Redcentric reported interim results just before Christmas, on 23 December. These showed 5.9% recurring revenue growth - 1.9% organic - to £44.7m. That means 84% of otherwise broadly flat revenue of £53m, with 38 new clients and key wins in the half.

That last point about new customers is important because there had been worries that new customers would be reluctant to commit to doing business with the company given its problems. Concerns that Redcentric's struggles could even spark a mass exodus of existing clients equally appear wide of the mark.

The share price stubbornly refused to budge on the day, staying largely flat at 84p, although some progress has since been made.


Issue Date: 11 Jan 2017