Period

3Q15/9M15

Actual vs. Expectations

Redtone (RIB) reported a PATAMI of RM3.2m in 3Q15, bringing its 9M15 to RM12.9m (-12% YoY). The result was below expectations. It was recorded at the lowerend of its historical trend at 43.4% (9M14: 65%; 9M13: 39%) of our full-year estimate.

The less encouraging 9M15 results were mainly due to the T3 extension project deferment, equipment ordering lead time and technical configuration complications. Meanwhile, the increase in payroll and related costs (that was mainly caused by the projects' preparation) was not sufficient to support the drop in data projects as a result of the project deferment.

Nevertheless, management believes the T3 extension project will commence to contribute positively to the group from FY16 onwards.

Dividends

No dividend was declared as expected.

Key Results Highlights

YoY, 9M15 revenue climbed by 10% to RM119m, thanks to the higher contribution from its voice (+20% to RM48m) but partially offset by lower data revenue (-2% YoY to RM66m) as a result of the project deferment. The growth, however, was not sufficient to offset the higher costs (i.e. payroll and related OPEX) that arise from the project preparation stage. Coupled with some equipment ordering lead time and technical configuration complications, its EBITDA was reduced by 11% to RM14.6m with a thinner margin of 17.8% (vs. 22.0% a year ago).

QoQ, turnover was lower by 12% as a result of the seasonal factors (due to various festive periods) and T3 project extension project deferment, which led the data segment’s revenue to decline by 14%. If there were no project deferment, the group’s data segment revenue would have improved by more than 20%. Its PBT, meanwhile, dropped by 21% as a result of the lower revenue and higher OPEX incurred during the quarter.

Outlook

Data, broadband and managed services will continue to support the group’s earnings potential moving forward. The group’s near-term catalysts include: (i) continuous government & corporate data-related projects (i.e. teleradiology & healthcare solutions), and (ii) successful transfer to Main Board listing.

Having said that, with the recent General Offer launched by its major shareholder – Berjaya Corp., RIB’s long-term outlook is very much dependent on the latter’s intention, which remains vague at this juncture.

Change to Forecasts

Post-results, we have lowered our FY15E net profit by 41% to RM17.4m as a result of the project deferment. Meanwhile, we also launched our FY16E numbers, where we expect the group’s net profit to hit RM39.4m (+126% YoY) underpinned by various data projects contribution. Note that we understand that the group is currently bidding some sizeable projects (i.e. teleradiology & healthcare solutions), which could further strengthen its prospects, if successful. Despite management remaining fairly optimistic, we have yet to factor in any contribution into our financial model.

Rating

Accept offer

Valuation

Accept offer as the offer price of RM0.80 is higher than the current share price. Nevertheless, we advocate long-term investors to continue holdings the shares, while awaiting catalysts to materialise over the mid-to-long term.

Having said that, should the company’s direction remain unchanged for the next 12-month and based on the current available data, we estimated that RIB could post a net profit of RM39.4m in FY16. Its EPS, however, would be diluted followed a series of ESOS and ICULS conversion. Assuming full conversion, its share base would balloon to 783.5m in FY16 from the current 521.4m in end-3Q15. Thus, assuming a 25%-30% discount (as a result of its smaller market cap) to the big cap telco average forward PER of 23.1x, RIB could be valued at RM0.81-RM0.86 based on FY16E EPS.

Risks to Our Call

Failure to secure more corporate and government projects.

Source: Kenanga Research - 5 May 2015