Red24 is king of cash, but shares are cheap

Red24 is a company you need in a crisis. It helps evacuate corporate personnel from global trouble spots, supplies close protection services, resolves kidnapping and extortion incidents, and runs around-the-clock crisis support departments. Clearly, these services are in high demand as the AIM-listed, cash-rich company now thinks it will beat full-year forecasts. Its share price, however, appears not to reflect the potential.

"Trading during the latter part of the year to 31 March 2015 continued to improve, particularly in the group's consultancy and special risk areas," explained the firm. "As a result, the board considers that the company's financial performance in the year to 31 March 2015 will be ahead of board expectations."

It's a great performance from Red24, coming just eight months after it lost a slug of income from HSBC, one of its biggest customers, who scaled down its product offering. Initial estimates put the lost revenue for this year at up to £500,000 and lost pre-tax profit of £250,000.

The company says is offset the impact by cutting costs and winning new contracts with both existing and new clients. It's managed its working capital better, too, and year-end net cash is a better-than-expected £3.2 million, implying cash inflow of about £1.2 million.

Crucially, the current financial year has started well, with new contracts signed with insurers in the product safety and special risk areas. Red24's enhanced travel tracker is selling well, too, and recent sales in Germany and Australia have beaten expectations and should continue to do so.

Despite its success, Red 24 shares look cheap. Yes, there is the risk of losing a big client, as evidenced last summer, but management has proved skilled at mitigating one-off events.

Following this latest update, house broker finnCap has upgraded earnings per share (EPS) forecasts for the year to March 2015 for the second time in two month, this time by 22% to 1.79p. It now expects adjusted pre-tax profit of £1.2 million in 2016, giving adjusted EPS of 1.98p.

Even at 18.2p, up 12% Monday, Red24 shares trade on a modest 9 times earnings estimates for 2016. However, that cash pile accounts for over a third of the company's market capitalisation and is worth about 6.5p per share. Strip that out and the current-year EPS multiple drops to just 5.9 times.

"This looks attractive to us given the 20% forecast growth profile and strong cash flow characteristics of the business," says Mark Paddon at finnCap who raises hit target price to 22p. There's also a prospective dividend yield of 3%.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.