Period     3Q13/FY13

Actual vs. Expectations     Redtone’s YTD 9M13 NP of RM9.9m came in within our expectations and accounted for 41% of our full-year estimates. We understand that the group will recognise soon a sizeable revenue from the USP project as well as its maiden spectrum sharing fee from Maxis. Together with the significant cost synergy as a result of its larger economic of scale in 4Q13, this should bring its full-year NP close to our estimate of RM23.6m.

Dividends      No dividend was declared during the quarter as expected. For the full financial year, we expect the group to declare a 1.5 sen DPS, which implies a 3.4% dividend yield and translates to a 30% payout ratio (in line with its dividend policy of a minimum 25% payout ratio).

Key Result Highlights     YoY, Redtone’s 9M13 revenue soared by 158% to RM98m, mainly driven by the strong contribution from its data segment (+117% to RM45.4m) as a result of its RM82.5m USP project. Based on our estimate, the group has recognized about 20% of the USP project in 3Q13. The group’s PBT meanwhile soared 36-fold to RM12.3m, thanks to the divestment of non-core and loss-making businesses as well as from the higher data revenue. In tandem, the NP also surged by 26-fold to RM9.9m although its rise was restrained by a higher effective tax rate.

QoQ, the turnover improved by 52% due to the higher revenue from the data segment. The group’s EBIT surged by 42% to RM6.2m while the margin was lower at 15.3% (vs. 16.4%) as a result of a higher direct cost. The net profit, however, was relatively flat at RM3.9m (-1%), hampered by a higher effective tax rate of 36.8% (vs. 6.2% in 2Q13) due mainly to the higher tax provisions at its subsidiary companies operating in China.

The group’s total borrowings stood at RM2.6m while its cash and bank balances were at RM34.9m in 3Q13, implying a net cash per share of 6.7 sen.

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

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.

Change to Forecasts      There is no change in our FY13-FY14 earnings forecasts post the 9M13 results.

Rating    Maintain OUTPERFORM

Valuation     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.

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