News    REDtone has entered into an agreement to divest a 21% stake in its subsidiary, Redtone Network S/B (“RN”) to D.Y.M.M. Sultan Ibrahim of Johor for a total cash consideration of RM315k, bringing the latter’s stake to 51%. The divestment is expected to be completed by 15 June 2013. 

RN, Puncak Semangat and i-Media had been shortlisted by MCMC for the digital terrestrial television broadcast (“DTTB”) infrastructure contract in November 2012.

REDtone said that the DTTB business would involve continuous investments and a full management commitment and added that the Johor sultan had graciously agreed to invest in the DTTB business should the contract be awarded to RN.

Meanwhile, in a separate press release, REDtone said was working with Huawei, Media Broadcast GmbH (“MBG”) and PwC in its DTTB bid and is expected to submit a detailed business plan on June 3 for the second tender process. Huawei will be its Technology partner and system integrator while MBG of Europe will design the network and complete the operational requirement for the DTTB project.

Comments    The whole DTTB is likely to cost RM1.0b of which RM300m is to supply set-top boxes based on earlier press report. The strong shareholders in RN will no doubt enhance the competitiveness of its DTTB bid. The group believes that the MCMC is likely to announce the final evaluation result by end-3Q.

We understand that the final evaluation will only see one winner selected to roll out the DTTB services to the public in early 2014. A full nationwide coverage is targeted to be reached by end-2015.  

Outlook    REDtone’s near term catalysts will be mainly led by its RM82.5m USP project as well as the synergies arising from its recent NSA agreement with Maxis.  

The group’s future earnings are likely to depend on: 1) its ability to secure more USP projects and 2) the degree of aggressiveness of Maxis’ 4G LTE services rollout, which we have yet to impute into our forecasts. 

Forecast   There are no changes in our FY13-FY14 earnings forecasts. 

Rating   Maintain OUTPERFORM

We believe that investors have overlooked the potential earnings upside of REDtone for both FY13 and FY14. We expect the group’s net profit to reach RM23.6m (more than a 10-fold YoY jump) in FY13 and thereafter to RM25.0m (+6.0% YoY) in FY14.  

Valuation    We have raised our target price to RM0.75 (from RM0.56 previously) after rolling over the valuation base year to FY14 with a higher targeted PER of 14.5x (+0.5 SD). We believe the recent positive corporate developments within the group will likely lead to a PER band expansion where we previously valued the company based on a 2-year average PER of 11.0x.  

Risks    Dependency on a major partner – Maxis.  

Failure to secure more USP programmes.

Source: Kenanga