Period  2Q14/1H14

Actual vs. Expectations Redtone’s 2Q14 NP of RM9.7m (+62% YoY) came in within expectation which accounted for 36% of our fullyear estimates (vs. 15.8% in 1H13). We understand that the group will recognize more of its government projects worth RM82.5m in the remaining quarters. Coupled with better economic of scale, this should bring its full-year NP closer to our estimate of RM27.2m.

Dividends  No dividend was declared as expected.

Key Results Highlights  YoY, 1H14 revenue advanced by 16% to RM66.6m, mainly propelled by the strong contribution from its data segment (+85% to RM39.5m) which was driven by various government projects as well as higher data and application revenue contribution. The group’s PBT, meanwhile, soared 92% to RM11.7m, due to the cost synergies created post-divestment of non-core and loss-making businesses as well as from the higher data revenue. The strong growth rate, however, was partially offset by a tax deduction (instead of tax refund in the previous financial year) thus boosting its NP to advance by 62% to RM9.7m.

 QoQ, turnover decreased to RM30.5m (-16%) in 2Q14 due to the lower data segment revenue that mainly caused by the absence of revenue contribution from the RM82.5m government project. The group’s EBIT improved by 45% to RM6.8m, thanks to the RM5.0m disposal gain arising from REDtone Mobile S/B. Its PBT margin was also enhanced, to 23.2% (1Q14: 12.9%; 2Q13: 15.8%) due to a larger economic of scale and higher data segment contribution.

 Cash & bank balances continued to grow which stood at RM42.2m while its total borrowing was at RM5.7m in 2Q14, implying a net cash per share of 7.2 sen. Its reserve, meanwhile, increased to RM65.3m from RM59.3m as at end-FY13.

Outlook  Data and broadband service is expected to continue to be the main contributor in FY14. To further enhance its turnover, we understand that the group intends to tender for more government projects and secure more SME customers.

 Meanwhile, we believe the failure to secure the recently announced DTTB infrastructure contract may not necessarily be a negative given that some of the key parameters have come in at the lower end which may affect the project’s ROI.

Change to Forecasts Raise FY14 and FY15 earnings forecast by 1.3% and 1.8% after fine-tuning. Meanwhile, we have also realigned the number of shares to 507m from 479m previously.

Rating MAINTAINED OUTPERFORM

Valuation  Roll over the valuation base year to FY15 but maintained our target price at RM0.81 based on unchanged FY15 targeted PER of 14.5x (+0.5SD).

Risks to Our Call Dependency on sole major partner-Maxis

 Failure to secure more government programmes.

Source: Kenanga