At a time when commentators are suggesting that many tiny Aim companies can no longer justify their listing, it was refreshing to meet with Maldwyn Worsley-Tonks, CEO of red24 Plc.  This small security specialist company has a market capitalisation of just £1.2 million but the CEO believes that the cost of the Group’s Aim listing is fully justified and he looks forward to retaining the Aim listing as red24 grows over the coming years.

Maldwyn’s optimism for the future can be justified by the Group’s recent performance. He took over as CEO some 18 months ago and in this time has overseen a move to profitability for the first time in 10 years. This unique small business appears to have a lot of potential and is worthy of further investigation.

The Business

red24 provides a range of security services to individuals and companies. All clients receive access to red24’s impressive web site offering up to date security information for every country. The ‘package’ which they provide for each customer will be made up from the following range of services:

• Online global intelligence and security advice
• Security email updates
• Tailored travel briefings
• Interactive Adviceline telephone support
• Physical response and rescue
• Travel tracking

For personal customers the red24 service is usually offered as an additional benefit with a product or service. For example HSBC ‘Premier’ and ‘Plus’ bank accounts offer red24 services for account holders. In the past red24 did sell its services direct to consumers but following adverse claims experience this service has been discontinued.

For business customers red24 will offer a bespoke service. For example, one large retail clothing chain, with several buyers who frequently visit remote parts of Pakistan, has purchased a number of red24’s services to help safeguard their employees in these regions.

Many of the red24 packages sold include a ‘rescue’ service whereby arrangements are made for individuals to be transported away from a particular trouble spot. For example, during last November’s Mumbai attacks red24 had a number of clients trapped in hotels in Mumbai. During the crisis red24’s South Africa based crisis response centre was able keep in regular contact with these clients and as soon as conditions permitted were able to arrange for vehicles to collect and transport them away from the trouble spot.

red24 has recently launched a Travel Tracker service, which enables a company to be advised of an employee’s location when travelling abroad. This service is valued by some organisations who wish to better manage the risk of their combined travel footprint.

clients receive access

to red24’s impressive

web site offering up to date security information

for every country

Most of red24’s business originates from the UK but some progress is being made with overseas sales. The Group’s products have, for example, been well received in South Korea.

In addition to the services mentioned above, red24, through its Arc Training subsidiary, runs Security Management courses. Arc provides a wide range of courses aimed at security managers at home and abroad. In the last financial year training revenue represented 28% of the Group’s total revenue.

red24 announced in December 2008 that travel market distributor, AIG Travel Assist, had begun to provide red24 services in North America to a large insurance company. The RNS statement went on to state: ‘It is estimated that the red24 services will be provided to a significant number of users for an initial period of three years. In the current financial year this will add 10% to the gross revenues of the Company.’

The financial problems of the AIG Group have been well publicised and these problems raise some concerns about the future of this business for red24. However, in red24’s interim results the Group gave some reassurance by stating: ‘It is evident that the current turmoil in capital markets has had a dramatic effect on AIG and it is by no means clear what the final outcome will be. However, our product is valued by a number of AIG operating companies and we anticipate being able to establish a relationship directly with those companies if their ownership becomes fragmented.’

Shares

The Group first floated on Aim in 1999 as Perthshire Leisure Plc, to roll out a bar concept.  This did not flourish and the units were sold off. The shares were re-admitted to Aim in 2002 following the reverse takeover of ARC Risk Management Ltd. The Group changed its name in 2007 to red24 plc to reflect the growth in sales of its key brand. 

After some years of poor performance the share price has stabilised over the last year during which time the share has comfortably outperformed the Aim All Share Index.  This improved share price performance in an extremely difficult market reflects the improvements in the Group’s results.

The Numbers

red24’s interim results to September 2008, issued in November, showed a welcome return to profitability after 10 years of losses. The Group had been marginally profitable in the second half of the previous year. The table below shows the improving trend.

Hoodless Brennan’s forecasts for 2009 and 2010 are shown in purple at the foot of the table. These forecasts were issued in September 2008 prior to the interim results and hence will not be based on the most up to date information.  These forecasts imply that red24 at 2.75 pence is trading on a forward p/e of just over 4.

Results for the 2009 year are due to be issued in June and a revised analyst forecast is expected to be released soon after these results. If the results show progress continuing at a similar rate to the first half, then the above forecast will be easily beaten and an upward revision of forecasts for 2010 must be on the cards. The Group has indicated that it will consider dividend payments in future.

Having recently paid off £125,000, red24 has £250,000 of outstanding debt in the form of 12% loan notes with a redemption date of 30 September 2010. £190,000 of these notes are held by Sidebell Ltd, a company controlled by Simon Richards the Executive Chairman of red24. Simon, mainly through Sidebell, is the largest shareholder in red24 with a holding representing 29.27% of the Group’s issued share capital.

These forecasts

imply that red24

...is trading on

a forward p/e of

just over 4

Strategy

When Maldwyn Worsley-Tonks took over as CEO some 18 months ago he was quick to reduce costs. In particular, the Group closed their Japanese office and made significant reductions in South Africa.

red24 has also changed its sales strategy to better support deals of all sizes. Previously there had been a strong focus on the larger opportunities similar to the HSBC and AIG arrangements. Whilst red24 are still cultivating these larger opportunities, which tend to take a very long time to complete, they are also pleased to promote the smaller deals. Maldwyn explained to me that the smaller contract wins would not show up in RNS statements as each one only represents a small percentage of turnover, but taken together these deals are important.

I asked Maldwyn about red24’s competitors. Surprisingly, he indicated that the Group face little in the way of direct competition as they are unique in the set of services they provide, although, some companies will provide some of the red24 services. Maldwyn went on to explain the red24’s business represents a ‘miniscule percentage’ of the global security market and hence the opportunity for growth is considerable.

Looking ahead, red24 is looking at ways they can expand their offering. For example, they may consider introducing a service to locate people in an emergency using mobile phone coverage. In the longer term, they will consider expanding by acquisition, but conditions (and the red24 share price) would need to change before such a move could be considered.

Investment Considerations

It would seem that the red24 business is not suffering due to the current economic difficulties. However, there are some risks to red24’s business going forward, particularly with a significant percentage of their business coming from 2 very large customers.  Whilst the Group has moved into profitability there is yet somewhat limited scope to deal with major unexpected difficulties.

That said, like many of Aim’s minnows, red24’s share price is at a very low level, particularly as the company is now profitable, cash generative and has little debt. As noted earlier, the 2010 p/e at the current share price is approximately 4 and this is using seemingly conservative growth assumptions. 

In the past, as Arc Risk Management, the Group has shown promise but then disappointed. At least today’s improving picture is supported by real profits and it will be interesting in June to read the final results, for the year to 31 March 2009, to see if the recent improvements are continuing.

I believe that the Group’s management have adopted a practical and cost effective approach to their business. Maldwyn and his team seem to have good prospects of succeeding in maintaining the growth and improved profitability going forward. If they do succeed then we would expect to see a considerable improvement in the share price from this low level.

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Written by Michael Crockett, Aimzine

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