Redishred Capital Corp. (RDCPF:OTCMKTS;KUT:TSXV), also referred to as KUT, is expecting to experience significant growth through cost execution and mergers and acquisitions this year. In an April 24, 2023 report, Amr Ezzat of Echelon Capital Markets wrote that the company "reported strong Q422 results, reflecting double-digit organic growth, considerable M&A contribution, and strong paper pricing. Specifically, sales and EBITDA were ahead of our forecast."
Despite higher fuel costs and driver wages, KUT's corporate locations experienced significant margin growth, which leads Echelon to believe that the company presents optimistic risk-reward characteristics for investors. Due to the company's intention to continue re-investing into new acquisitions, Ezzat predicts, "We expect management to go cherry-picking and deploy more capital into accretive tuck-ins."
Review of Results
Ezzat presented the key points of Redishred's latest reports.
Redishred experienced sales growth of 47.8% y/y compared to the same quarter the previous year, leading to a record high of US$15.4 million. Part of this success is due to the relaxation of COVID-19 restrictions in the business industry and increased demand for shredding, disposal, or scanning of documents. Shredding has proven to be the company's biggest area of growth, followed by e-waste disposal and scanning.
With its hold in the recycling sector, Redishred was able to take advantage of increased recycling prices last year.
KUT's EBITDA for Q422 was US$3.1 million, exceeding expectations. While the company ended last quarter with a raised debt, up from US$16.4 million to US$25.1 million, Echelon points out that this increase is due to the acquisition of Proshred Philadephia in November 2022 at the cost of US$9.7 million. This purchase was financed through cash and borrowing, but the company is expected to recoup its losses with this merger.
Valuation
Ezzat reiterated Redishred's previous Buy rating and proposed a target price of US$8.25 per share, saying that, "Redishred remains one of Echelon's Top Picks."
He argues that the company is undervalued compared to its competitors even though it is experiencing higher growth rates. "KUT trades at a steep discount to the aforementioned peer groups on an NTM EBITDA basis (~6.0x versus ~13.2x for the peer group) despite its healthier growth profile (revenues/EBITDA expected growth rate of 6.5%/8.9% versus the peer group's 6.3%/8.3%)," Ezzat writes.
Structure and Predictions
Ezzat's research report shares recent rating and target price information as well as current market data on the company:
Rating: Buy
Price: US$3.90, with a 52-week range of US$3.15-US$4.50
Price Target: US$8.25
Market Cap: US$70.90 million
The company carries an enterprise value of US$96.1 million and a net debt of US$25.1 million. Redishred's share structure breaks down to 18.2 million basic shares and 18.2 million fully diluted shares.
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Disclosures for Echelon Capital Markets, Redishred Capital Corp., April 24, 2023
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ANALYST CERTIFICATION
Company: Redishred Capital Corp. | KUT:TSXV
I, Amr Ezzat, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report.
IMPORTANT DISCLOSURES
During the last 12 months, Echelon Wealth Partners Inc. provided financial advice to and/or, either on its own or as a syndicate member, participated in a public offering, or private placement of securities of this issuer. During the last 12 months, Echelon Wealth Partners Inc. received compensation for having provided investment banking or related services to this Issuer.
