We are adding 30k REDTONE-WA @ 0.470 each to our Thematic and Growth Portfolios. The group reported its 1QFY14 result last week which came in within our expectation. It posted a strong 1QFY14 net profit of RM3.6m (+82% YoY), mainly driven by the cost synergies created post divestment of non-core and loss-making business coupled with the higher data revenue.

The group’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 bidding (i.e. DTTB project) would be the next key catalysts. Should its 49%-stake own Redtone Network S/B (51%-stake are owned by Johor royal family) manage to secure the project, we believe there is a likelihood for the latter to seek for public funding in the near-term which will unlock Redtone’s shareholder value.

At present, our target price for Redtone is RM0.81 (based on a targeted FY14 PER of 14.5x) which implied a target price of RM0.56 to the group’s warrant. Note that, the group has a total warrant outstanding of 162.4m shares (based on Bloomberg estimate) with a strike price of RM0.25. The warrant is set to expire on 3/4/2015. 

Source: Kenanga