News  Redtone (RIB) announced that Messrs. Crowe Horwath, the company’s external auditors, have expressed a qualified opinion in their report in respect of a debt owing by a third party that stood at RM15.6m for the financial year ended 31st May 2014.

 RIB board, however, are of the opinion that the amounts are recoverable and accordingly no impairment has been made in the financial statements.

 Had an adjustment for impairment on these Other Receivables been made, the carrying value of Other

Receivables would decrease by same amount for the Group. Similarly profit for the year and retained profits would decrease similarly by the effects of this impairment for the Group.

Comments  We were caught by a surprise on the above issue. While management strongly believes the amounts are recoverable despite being long outstanding, the news is expected to cause some negative consequences to the share price, at least in the near term.

 We understand that the group had earlier targeted to apply for a transfer to Main Board listing following the release of its FY14 audited account. Nevertheless, in view of the above qualified opinion made by the external auditor, we expect some hiccups during the process.

 Having said that, we believe, RIB’s businesses are not expected to see any material impact should the group fail to transfer its listing status.

Outlook  RIB’s near-term catalysts include: (i) synergistic benefits that could be created under the NSA agreement with Maxis, and (ii) continuous government & corporate data-related projects. On the flip side, negative sentiment could arise on: (i) further impairment and (ii) failure to transfer to Main Board listing.

Forecast  There is no change in our earnings forecast for now given management are of the view that the outstanding debts are recoverable.

Rating Maintain MARKET PERFORM

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; impairment arises.

Source: Kenanga