The failure to secure the DTTB infrastructure contract by Redtone Network S/B (49% owned by Redtone International) may not necessarily be a major negative to the group given that some of the key criteria have come in at the lower end which may affect the project’s ROI. These include: (i) non-inclusion of the vital 695Mhz-742Mhz frequency band and (ii) longer-than-expected gestation period. We also notice that of late, Redtone International (Redtone) has been executing share buy-back which lend credence to the stock’s prospects. Meanwhile, the group is confident of achieving a 50% QoQ jump in PBT for 2Q14 results, scheduled to be released late-January. There are no changes to our FY14 and FY15 earnings estimates as we did not assume any DTTB earnings contribution in our financial model. We maintain our OUTPERFORM call on Redtone with an unchanged target price of RM0.81, based on targeted FY14 PER of 14.5x.

Failed to secure DTTB infrastructure project but… Puncak Semangat S/B (PS), controlled by tycoon Tan Sri Syed Mokhtar Al-Bukhary, has been named as the successful bidder (edging out two other bidders namely Redtone Network S/B and i-Media broadcasting Solutions S/B) by the Malaysian Communications and Multimedia Commission (MCMC) to build, operate and manage the infrastructure for Digital Terrestrial Television Broadcast (DTTB) service in Malaysia yesterday. The concession is for a period of 15 years (from the date of award) including simulcast and implementation period. (Please refer to our Media sector report dated 24 Oct. 2013 for the detailed information on DTTB).

… could be better-off. While the news appears to be unfavourable to Redtone at first glance, the group could be better-off by not securing the DTTB contract given that some of the key criteria (as set out in the earlier tender documents) have come in at the lower end. These include: (i) non-inclusion of the vital 695Mhz - 742Mhz band, where PS will only have the right to use the frequency of 470MHz-694MHz before and after the analogue switch off (ASO) instead of both frequency bands. The 48MHz lesser band frequency implied fewer digital TV channels, which could be introduced in the future. Note that MCMC has allocated the 695MHz-742MHz band, which have a strong in-building mobile signal penetration capability, for high speed mobile broadband services post ASO and (ii) longer-than-expected gestation period.

While the first roll-out of DTTB services is projected to be in 3QCY14, for a start in a few test areas, the full nationwide coverage is only expected to be completed by 2017 in contrast to the previous target of end-CY15. Meanwhile, the Communication and Multimedia Minister was also recently being quoted by the press that the government will only decide to end analogue TV broadcast services by 2020. Based on our earlier understanding, the successful bidder can only commence billing charges post the ASO, thus making the ROI a big challenge under the project deferment.

Executing share buy-back account. Following the renewed approval received from its shareholders, Redtone has started to execute its share buy-back account to reaccumulate its shares since last November. The group has, thus far, accumulated a total of 1.67m shares with an estimated average price of RM0.67/share as of 9^th January.

Divestment gain. The recent disposal of the remaining 35% shareholding held in its associate, Redtone Mobile S/B (RMSB) to Theo Networks S/B is expected to generate RM5m divestment gains for Redtone Group in FY14. Note that the group had earlier on 3 January 2012 divested its 65% stake in RMSB, which principal activity is the operating of a mobile virtual network and research, design, develop and commercialise the VOIP customer premise equipment. The rational of the disposal is to enable the group to focus on its core business offerings as a total service solution provider to corporate/SME/government segments as well as the management and building of WiFi network.

Confidence to achieve 50% QoQ growth in PBT in 2Q14, where Redtone is scheduled to release its report card by late January, underpinned by the healthy growth of its core businesses, on-going various government projects as well as the synergic benefits created under the NSA agreement with Maxis.

Source: Kenanga