News     Redtone has teamed up with Telekom Malaysia (TM) in a wholesale ethernet deal, where TM will provide the former with instant access to all TM’s Metro-E infrastructure nationwide.

Management indicated that the latest partnership with TM will allow the group to have the opportunity to provide the high-capacity Metro-E product as an additional offering to its corporate customers numbering more than 10k currently.

Comments     We welcome the above partnership, which we believe will allow Redtone to further widen and strengthen its corporate segment via its upcoming new products launches (i.e. high-speed internet, video conferencing and collaboration, video/media streaming and data centre/data recovery centre).

We understand that TM’s wholesale Ethernet is a high–speed Wide Area Network (WAN) based on Carrier Class Ethernet standards that offers high-speed and flexible bandwidth. It connects multiple locations of a business, whether located in the metropolitan areas or nationwide and is capable of offering scalable bandwidth capacity from 100Mbps to 1Gbps. Wholesale Ethernet is targeted for the business segment and applicable for various industries of different sizes.

Outlook      REDtone’s near term catalysts will be mainly led by its RM82.5m USP project as well as its upcoming RM25.0m spectrum resource sharing fee.

The group’s future earnings are likely to depend on: 1) the 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 are maintaining our target price at RM0.56 based on an unchanged targeted FY13 PER of 11.0x.

Risks      Dependency on a major partner – Maxis.

Failure to secure more USP programmes.

Source: Kenanga