Redtone International Berhad

Business Segment:

1.） Telecommunication services:

Provide high quality internet services to customers(mostly corporate).while businesses today can easily sign up cheap internet package with Telekom or other telco,and spend merely few hundred ringgit per month on internet,but many company that rely on internet to run their business wont actually do that,they’ll go for Redtone.

As we known,TM use fibre optic or cable to provide internet service,while other wireless telco use telco tower to provide same service.But for Redtone,they’ll combine both fixed line and wireless,as well as other communication technology like satelite,wimax,microwave…etc.thats means internet downtime can be reduce significantly as various technology complement each other.

So,for businesses that require stable internet connection,they wont simply spend few hundred ringgit to sign up premium package with well-known telco in the market,but rather spend thousands to hire expert like Redtone to reduce connection risk,since internet disconnect is very costly to these businesses.       

As of today,redtone is servicing more than 15,000 companies

2.）Managed telecommunication network services ("MTNS")

Provide WiFi project implementation and Telco engineering services.Redtone is the largest 3rd party neutral MORAN (Multi-Operator Radio Access Network) operator in Malaysia,the company have successful implemented several large-scale government projects like Kampung Tanpa Wayar (KTW), Time-3 (T3), Pusat Internet 1Malaysia (Pi1M) and other Universal Service Provision (USP) initiatives.

Redtone has been working with MCMC for many years,participated various national project and helped MCMC to expand internet connection especially in rural area,the best example could be TIME 3 extention project that awarded to Redtone at Dec 2017,the contract worth RM250 million,which require Redtone to install 2G and 3G in certain rural area,the project is currently ongoing.

Given government intent to accelerate internet coverage in whole malaysia especially rural area,internet related expenses will be very huge and will be one of the focus area in coming years

3.）Industry Digital Service

Involved in exploration of new technology application especially IOT in various industry like agriculture and healthcare.This business not significant at group level at this junction but some good news did appear recently,included management restructuring of the losses making health care business,and also Won a contract to implement IOT Smart farming solution with Bangi Farm.

However,i think this segment will continue to be insignificant at group level in short term.

Financial Condition:

1.）Result is improving.

As we can see,after business restructuring(cut losses making oversea business,restructured management and asset Write off) in FY 2016,Redtone’s result is improving for 3 consecutive year,the momentum is expected to continue as MTNS business(which is losses making in past) started to contribute significantly to the bottom line.

2.）Strong Balance Sheet:

Redtone had very strong and clean balance sheet.As at 30 april 2019,Net Cash stood at RM75.38 million or almost 10cen per share,the company already paid off almost all the outstanding debt,any dividend announcement in the future wont be a surprise given the strong financial condition and healthy cash flow.

Exciting Prospect:

1.）Potential Budget winner:

According to Finance minister Lim Guan Eng,communication and multimedia ministry will need RM21.6 billion investment from 2019 to 2023.and a large portion of the investment would be funded by the Universal Service Provider (USP) Fund managed by MCMC.

Lim also said the government is currently organising a series of focus group discussions to obtain views and recommendations for the 2020 Budget to be tabled on Oct 11, 2019.(Full Article:https://www.malaysiakini.com/news/487778)

As Redtone had worked on the internet expansion project with MCMC for the last 7 year,and is currently implementing the TIME 3 extension project,The company should be benefited from the huge CAPEX that MCMC gonna spend in years to come, as Redtone already participated in USP project and working with MCMC for so many year,not many people had realize this.

So,if there is any related announcement in coming Budget,Redtone could be one of the potential winner.By the way,I could not found another winner except Redtone since it is only listed company that own the expertise.(please kindly inform me if you found another one).

2.）5G On The Way!

As we known,Malaysia is preparing for 5G implementation.But what is the potential impact from 5G?

To Telecommunication services business,5G should bring in neutral impact in short term but positive in longer term,That is because Telecommunication services is technology adaptor business in nature,means they’ll adapt but not develop the new technology,the development investment mostly come from government or big telco,

However,when 5G in place,the demand of internet should increase further as more and more company will rely on internet to run their business,there will be more opportunities for Redtone to grab.

As for MTNS business,5G is definitely a big bonus as MCMC and Telco have to spend substantial  CAPEX to expand or upgrade existing infrastructure to adopt 5G.As LGE mention,the amount will be RM21.6billion for the next 4 year,means more than RM 5 billion per year in average.Even if Redtone only manage to grab a small slice from it, that’ll be big enough to the company.

3.）corporate exercise?

Redtone’s sister company--U Mobile is mulling to become listed company by next year(according to substantial shareholder).However,even merger between Redtone and U mobile is making sense(since combine entity will become an comprehensive telco player that involve retail,corporate and telco engineering business.) ,it is merely a speculation at the moment.i’ll rather pay more attention to the business fundamental itself.

Impact of Trade War?

1.) communication services business

trade war isn't really matter as the service provided binding with formal agreement,and most importantly,"cutting internet" will never appear in any corporate's cost cutting plan as internet is too important as well as the expenses is not significant.

2.)MTNS business

trade war also not expected to cause any impact so far since the business rely on government or MCMC expenditure(which already announce to increase expenditure in next 4 year).The Universal Service Provider (USP) Fund manage by MCMC is contribute by major TELCO in malaysia,MCMC receive more than RM1 billion funding from telco every year,the fund will be use to expand malaysia internet penetration rate via projects like TIME 3 and TIME 3 Extention project,the funding model is unbeat,and it is pretty safe to assume MCMC able to stick with current plan despite trade war.

so,trade war might impact investor sentiment and share price,but business fundamental of Redtone will remain strong.

Conclusion:

Redtone is a company with good and resilient business,healthy balance sheet,and promising prospect.The telecommunication services business is very stable and profitable,MTNS business is return to black for two consecutive quarter and making significant contribution to top and bottom line,it is a game changer business,if the business continue to doing well and win more contract from MCMC,Redtone should able to deliver much much better result in coming years. 

I expect FY2020(1/7/2019 to 30/6/2020) will be a record breaking year in both Revenue and Net Profit,supported by more than 15,000 existing clientele and continue billing  from the RM250 million TIME 3 Extension contract.

At 37cen per share,investors valued Redtone at about RM280million only.This is not justify given its bright future prospect,excellent financial performance and RM75million strong net cash position.

To me,it is diamond priced like stone.

Disclaimer:

The analysis above is the result of my hard work,i’ve spend so many time in research and study,However,i might be right or wrong,i advise you to do your own study before making any buy or sell decision since you might come out with different opinion or conclusion,and you are fully responsible for all the risk and reward yourself.Thank you.