News  Redtone (RIB) announced that its 92.3% owned subsidiary, Redtone Telecommunications China Ltd (Redtone China), had entered into a share sale agreement with GUOTAI for the divestment of Shanghai Hongsheng Business Administration Co. Ltd (SHHS)’s 3rd party payment license for a total cash consideration of RMB28m (or c.RM14m). SHHS is a wholly-owned subsidiary of SQBA, which in turn is 100% owned by Redtone China.

 Based on the unaudited financial statements of SQBA, its net asset attributable to equity shareholders stood at RMB18.7m as of end FY14.

 SHHS’s 3rd party payment license is mainly involved in provision of prepaid shopping card services known as “VeryPass” in Shanghai.

 The divestment is expected to be completed by August 2014.

 Upon the completion, all the other telco-related businesses (i.e. marketing & distribution of discounted call, mobile reload, and other telco-related services for the Shanghai consumer market) will be transferred to Shanghai Huitong Telecommunications Company Limited, a subsidiary of Redtone China. Therefore, all existing telco businesses of SHHS shall remain with the RIB group.

 The rationale for the divestment is to allow Redtone China to generate cash for business expansion and to simplify its core business.

Comments  We welcome the divestment as it will allow Redtone China to further focus on its core businesses. The divestment is expected to result in c.RM5m net disposable gain which RIB plans to utilise as working capital.

Outlook  RIB’s near-term catalysts include: (i) synergistic benefits that could be created under the NSA agreement with Maxis, (ii) continuous government & corporate data-related projects, and (iii) transfer of listing to the Main Board.

Forecast  We have raised our PATAMI forecast by 16.6% to RM35.1m after imputing the abovementioned RM5m net disposal gain. Its core PATAMI, however, is maintained at RM30.1m.

Rating Maintain MARKET PERFORM

 Despite limited capital upside from here, we recommend investors to continue holding the shares pending the next key catalysts, which could materialise within the next few weeks.

Valuation  Maintained target price at RM0.77 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