Period     4Q13/FY13

Actual vs.  Expectations Redtone’s FY13 NP of RM25.2m (+1073% YoY) came in within our expectations. Its full-year revenue of RM141m, however, was 15% lower than our estimate due mainly to the deferment in revenue recognition  of some of its low-margin projects. 

Dividends    A maiden interim dividend of 1.5 sen was declared after a long dry spell (since FY06) with the entitlement  and payments dates to be determined at a later date. The dividend translates into a payout ratio of 28.5%, in-line with its dividend policy of minimum 25% payout ratio

Key Result Highlights    YoY, Redtone’s FY13 revenue jumped by 32% to RM141m, mainly driven by the strong contribution from its data segment (+206% to RM75.3m) that was led by its RM82.5m government project as well as higher data and application revenue contribution. Based on our estimate, the group has recognized about 20% of its government project in FY13. The group’s PBT, meanwhile, soared 9-fold to RM33.7m, thanks to the cost synergies created post divestment of non-core and loss-making businesses as well as from the higher data revenue. In tandem, the NP also jumped 10-fold to RM25.2m.  

QoQ, the turnover improved by 7% due to the higher revenue from the data segment. The group’s EBIT surged by 245% to RM21.4m as a result of highermargin data project recognition in the 4Q thus leading to margin expansion to 49.1% from 15.3% in 3Q13.  The exceptional high margins helped fuel Redtone’s recordhigh net profit of RM15.3m in 4Q13.    

The group’s cash & bank balances stood at RM36.5m while its total borrowing was at RM8.8m in 4Q13, implying a net cash per share of 5.8 sen.  Its reserve, meanwhile, increased by 79.7% YoY to RM59.1m. 

Outlook    REDtone’s short-to-mid term catalysts rely mainly on its RM82.5m government project as well as the synergistic benefits that could be created under the NSA agreement with Maxis. Meanwhile, any successful conclusion of its recent projects biddings could provide the next key catalysts. 

Change to Forecasts   We have raised our FY14 earnings by 1.3% to RM26.8m after fine-tuning. Meanwhile, we also introduce our FY15 numbers, where we estimate the group’s net profit to increase to RM27.7m (+3.3% YoY)  

Rating  Downgraded to MARKET PERFORM

Despite limited capital upside from here, we recommend investors continue to hold the shares pending the next key catalysts to materialise. 

Valuation     To align with our mild earnings upgrade, we have raised our Redtone target price marginally to RM0.81 (from RM0.77 previously) based on unchanged FY14 targeted PER of 14.5x (+0.5SD)   

Risks    Dependency on a sole major partner – Maxis.  

Failure to secure more government programmes.

Source: Kenanga