Period  3Q14/9M14

Actual vs. Expectations Redtone’s 9M14 NP of RM14.7m (+48% YoY) came in within expectations which accounted for 54% of our full year estimates (vs. 39% in 9M13). The results are deemed in line as more corporate & government projects (i.e. T3, WIFI & broadband projects) will be recognized in 4Q14. Furthermore, coupled with better economics 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, 9M14 revenue improved by 10% to RM107.5m, mainly propelled by the strong contribution from its data segment (+48% to RM67.2m) which was driven by various government projects as well as higher data and application revenue contribution. PBT, meanwhile, soared 47% to RM18.1m, due to the cost synergies created post-divestment of non-core and loss-making units as well as from the higher data revenue, which generally provides higher margin than its voice business segment.

 QoQ, turnover climbed to RM40.9m (+34%) in 3Q14 due to the higher data segment revenue. PBT, however, dipped by 9.3% to RM6.4m mainly caused by the highbase effect from a one-off RM5.0m disposal gain arising from Redtone Mobile S/B in 2Q14. The lower PBT led margin normalising to 15.6% (vs. 23.2% in the prior quarter).

 The group has purchased a total of 2.56m shares under the share buyback scheme (at an average cost of

RM0.66/share) in 3Q14, leading to a drop in its cash & bank balances to RM39m (vs. RM42m in 2Q14). Its total borrowing stood at RM8.8m in 3Q14, implying net cash per share of 5.9 sen. Its reserve, meanwhile, increased to RM70.4m from RM59.3m as at end-FY13.

Outlook  Redtone’s short-to-mid-term catalysts rely mainly on its RM82.5m Time 3 (T3) government project as well as the synergetic benefits created under the NSA agreement with Maxis.

 The group is also in the final discussion stage of few government & corporate data-related projects, which could provide further earnings growth opportunities.

Change to Forecasts There is no change in our FY14-FY15 earnings forecasts post the release of 3Q14 result.

Rating MAINTAIN OUTPERFORM

Valuation  Maintain our target price at RM0.81 based on unchanged FY15 targeted PER of 14.5x (+0.5SD).

Risks to Our Call

 Failure to secure more corporate and government projects.

Source: Kenanga