News    REDtone has entered into a share sale agreement with TSM Global Berhad (“TSM”) for the acquisition of the remaining 50% of Meridianotch S/B (“MSB”), which in turn owned 51% of REDtone CNXBroadband S/B (“RCB”), for a total cash consideration of RM490,001.

Upon completion of the acquisition, MSB will be a wholly-owned subsidiary of REDtone.

REDtone-CNX Broadband S/B is principally engaged in the provision of broadband services.      

Comments    We understand that the group is keen to assume full control of RCB, which is a provider of infrastructure & engineering WIMAX services in East Malaysia. 

By having a controlling stake in RCB, management intends to widen as well as leverage its expertise by providing telco infrastructure and engineering services (i.e. set-up and maintenance of telco basestations; network testing; project management) to the whole country.

Nevertheless, management does not expect the acquisition to have any material financial impact to the group in FY14.  

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: (i) its ability to secure more USP projects; and (ii) 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 pending the upcoming 4Q13 result scheduled for release tomorrow. 

Rating   Maintain OUTPERFORM (under review)

Valuation    We are keeping our REDtone target price of RM0.77 for now, pending the upcoming result release. Our current target price is based on targeted FY14 PER of 14.5x (+0.5SD).   

Risks    Dependency on a major partner – Maxis.  

Failure to secure more USP programmes.

Source: Kenanga