Red 5 Limited (RED) - Financial performance gradually improving...

Red 5 Limited (RED) - Financial performance gradually improving ( Petra 23/2/23)

RED’s 1H FY24 financial result was slightly above our estimates, driven by timing of sales and silver revenue. We see this as a solid result as free cash flow has now reduced debt to a manageable level, opening up options to refinance. From this, RED can refocus on organic growth and exploration to continue unlocking a unique, low cost and scalable operation.
We continue to believe the RED/SLR merger adds uncertainty, thus detracting from RED’s investment appeal.
However, RED is cheap at 4.6x EV/EBITDA 0.7x P/NPV. BUY.

Revenue and EBITDA slightly ahead

• EBITDA of A$97.4m was 2% ahead of our A$95.5m
• Higher D&A and financing costs (incl. leases) impacts NPAT of A$29m, well below our A$55m
• Free cash flow of $49.3m, 10% above our estimate driven by better cash receipts, with $3.8m coming from silver sales and c.$3m HoH difference in trade debtors
• $28.3m cash excludes $7.5m restricted cash and $6.2m bank guarantee over leased assets; aggregating these to $42m aligns with $41.7m in the quarterly
• Cash & liquid assets of $53.3m includes $6.8m gold sold on 29^th Dec with cash received on 3^rd Jan, plus $4.8m bullion; using these numbers, net debt is $49.2m
• Debt of A$102.5m, down A$23.7m HoH and scheduled to reduce to $63m by end CY24, net cash by end FY24

Strengthening financial position

• RED has steadily improved its financial position, with FCF applied to scheduled & voluntary debt repayments
• Debt refinance targeted for July, releasing restricted cash & covenants, allowing financial flexibility and a refocus on growing mine life and unlocking further value
• In the absence of the proposed RED/SLR merger, we had anticipated RED would be in a position to balance organic growth and dividends from FY25 onward
• EV/EBITDA of 4.6x, below the sector average of 6.5x and the 11.2x average ascribed to a “premium” peer group consisting of BGL/GMD/EMR/CMM

RED/SLR merger clouds outlook & investment thesis

• We maintain our view that the RED/SLR merger results in a less certain outlook for the combined business and hence diminishing RED’s investment appeal
• The deal structure allows an interloper, although we see limited approaches given the inability to conduct DD;
• we see RED/GMD as a natural and more value accretive fit

Key Dates Ahead

• April 2024 – MarQ report with output above guidance
• Mid-late May – Scheme meeting

This is a somewhat somber followup to the recent similar bullish appraisal of RED's strong fundamentals and M&A appeal.
Although REDGenesis has the best synergies, that would create a regional powerhouse, and hence a greater potential for short and long term valuation, I get the sense Petra doesn't think thats the way the cooky will crumble.
As Ive said before, RED-SLR will go ahead without a counter bid - this deal is first best for SLR, second best for RED.