Redtone, a stock that used to be one of investors' favourite stocks in its heydays, is expected to show a turnaround should the Maxis factor comes into the picture. The company is expected to receive a handsome recurring income from Maxis following the signing of an infra and spectrum sharing agreement. While Redtone is reluctant to elaborate on the quantum, we project the company could receive a total recurring income of RM295m over the next 10 years. This will boost its FY13 net profit to RM21.1m (~10 folds YoY) followed by RM24.5m (+16% YoY) in FY14. Under  such a scenario, we believe the group's fair value should  be pegged at RM0.50 based on a targeted FY13 PER of 11.4x. However, Redtone's existing businesses are expected to continue to underperform in the next few financial years due to persisting high operation costs and stiff competitions. As such, without the Maxis factor and solely based on its existing businesses, we would have valued Redtone at RM0.18, similar to the group's latest net asset per share. 

Some cost savings but '. The group's prior poor financial performances were partially contributed by its non-core and loss-making subsidiaries. Followed the completion of the divestment of a number of its non-core and loss-making subsidiaries, Redtone's total SG&A expenses are expected to be lower by 10% YoY to RM36.0m in FY13. To recap, the  sold divisions accounted for about 11% of the group's FY12 total SG&A cost of RM39.9m with barely any contribution to the top line. Going forward, the group's FY13 bottom line however, is still expected to underperform due to persisting high operating costs and stiff competitions. We expect Redtone to narrow its net loss to RM3.2m in FY13 from RM8.7m core net loss (exdeconsolidation gain of RM10.9m) a year ago, based  on the existing businesses.       

Riding on Maxis networks.  The recent infra and spectrum sharing agreement ('NSA agreement') signed by Redtone and Maxis is expected to benefit both parties. The combined spectrum will allow both companies to offer the fastest 4G broadband speed across the country of up to 150Mbps.

While Maxis is expected to benefit from the enlarged spectrum capacity, Redtone on the other hand is expected to have significant cost-savings on capex of about RM390m. 

The 'Maxis factor'.The NSA agreement will allow both parties to maximise the usage of the scarce combined 2.6GHz spectrum, albeit the respective AA (Apparatus Assignment) for the 4G spectrum have yet to be assigned by MCMC. In return, Maxis will pay Redtone an upfront payment in FY13 followed by a series of payments over the next 10 years. We understand that management is expecting the recurring income (from Maxis) to boost its financial performance significantly. Although Redtone is reluctant to divulge the exact quantum, we project  that Maxis could be value Redtone's 4G spectrum at RM295m based on our observation (please refer the inside of this report for more details).    

Valuation. In view of the company's bottom line still expected to post a loss in FY13, Redtone is likely to be fairly valued at its net asset per share of RM0.18. Nevertheless, should we include the 'Maxis factor' into our financial model; Redtone's FY13 is expected to record a net profit turnaround of RM21.1m. This will provide a strong rerating catalyst for the stock and raise our Redtone target price to RM0.50 based on a targeted FY13 PER of 11.4x.