Redtone International (Redtone) is confident of fulfilling the Main Market listing transfer requirements in end-FY14, underpinned by its: (i) higher data broadband services’ contribution, and (ii) ongoing government and private sector telecommunication infrastructure projects. The group is also expecting to secure an infrastructure project in the near-term which could provide earnings enhancement in FY14. Redtone’s cash position is expected to continue strengthening in FY14, which should enable the group to declare higher dividends. Meanwhile, the DTTB final evaluation process may be potentially delayed in view of the current prolonged process. Nevertheless, we reiterate our view that should Redtone manage to seal the DTTB project, it could provide a strong re-rating catalyst to the group. There is no change in our FY14-FY15 earnings estimates. We maintain our OUTPERFORM call on Redtone with an unchanged target price of RM0.81, based on targeted FY14 PER of 14.5x.

Aiming to transfer to the Main Market in CY14. Redtone is aiming for a transfer to the Main Market after FYE May 2014. Management is confident of posting its third consecutive year of profitability in FY14 and meeting one of the transfer's listing requirements (uninterrupted audited profit of 3-5 full financial years with an aggregate PAT of at least RM20m and a PAT for the most recent financial year of at least RM6m). Note that Redtone has recorded RM2.2m, RM25.2m, and RM3.6m net profit in FY12, FY13, and 1Q14, respectively. Moving forward, we expect the group to achieve RM26.9m net profit in FY14 underpinned by: (i) higher data broadband service contribution, and (ii) on-going government and private sector telecommunication infrastructure projects (i.e. tele-health; infrastructure sharing and WiFi hotspots).

Expected to clinch an infrastructure project in the near-term. Management is expecting to seal an infrastructure project for rural areas in the next 1-2 months. No details or earning's guidance was provided. However, management expects the project to contribute positively to the group’s earnings in FY14.

Cash pile expected to strengthen further. The group’s cash position stood at RM38.8m in 1Q14 with minimal borrowings of RM8.5m. However, its trade and other receivables stood at RM103.5m, of which RM25m was related to the spectrum resource sharing fee owned by Maxis. Management believes the abovementioned amount will be settled in the next few months, thus boosting its cash pile to c.RM60m. With a strong war chest, management does not discount the possibilities of rewarding its shareholders further through higher dividend payout in FY14. Note that, Redtone has a minimum 25% dividend payout policy. The group had declared a maiden 1.5 sen dividend in FY13, which translated into a payout ratio of 28.5%.

No solid progress on DTTB, yet. Redtone indicated that the authority has yet to conclude the digital terrestrial television broadcast (DTTB) final evaluation process, which initially was supposed to be announced in 4Q13, according to MCMC’s timeframe. Nevertheless, in view of the current prolonged process, there is a likelihood the evaluation process may now require more time. To recap, Redtone Network S/B, Puncak Semangat and i-Media have been shortlisted by MCMC for the DTTB tender. The winner will need to provide the platform for FTA broadcasters to migrate from the current analogue system to a digital broadcasting format.

Source: Kenanga