News

Redtone (RIB) announced that the unconditional GO has closed last Friday where BCorp had received valid acceptances that raised the combined holdings of the company and persons acting in concert (PACs) to 52.43% of RIB’s paid-up capital and ICULS to 70.59%.

As of the first closing date (May-8), it narrowly managed to make the offer unconditional with acceptances that brought BCorp and PACs’ stake to 52.17% (ICULS: 64.02%).

To recap, BCorp, the ultimate offeror via indirect unit Juara Sejati Sdn Bhd, had made a cash offer of 80.0 sen per RIB share and 32.0 sen per RIB’s ICULS on March 27, after having triggered a mandatory takeover obligation.

Comments

The lukewarm response from RIB’s shareholders’ for the GO even after a two-week offer extension is not a surprise given that the offer appears less appealing to long-term investors.

The recent emergence of two strong major shareholders (Sultan of Johor and Berjaya Group) have further enhanced RIB’s profile and competitive edge in projects bidding moving forward, especially from companies controlled by the Johor state’s government and/or other government-related projects. On top of that, we do not discount that some interesting corporate exercises and/or synergistic could be in the making, in view of the two prominent shareholders. Having said that, we believe the above-mentioned plans and/or catalysts will only materialise in the mid-to-long term.

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, we understand that RIB’s long-term outlook is very much dependent on the BCorp’s intention, which remains vague at this juncture.

Forecast

We make no change in our earnings forecast post the conclusion of the GO.

Rating

Changed to MARKET PERFORM (from Accept Offer previously).

Valuation

Assuming RIB’s direction remains unchanged for the next 12-month and based on the current available data, we estimate that the group could post a net profit of RM39.4m in FY16. Its EPS, however, will be diluted followed a series of ESOS and ICULS conversions. Assuming full conversion, its share base would increase to 783.5m in FY16 from the current 742.5m as of end 22- May 2015.

We value RIB at RM0.87 based on the targeted FY16E PER of 17.5x, in-line with its 3-year historical average PER. The targeted PER, meanwhile, also represents c.30% discount to the big cap telcos’ FY16E PER, which is within its historical 25%-30% discount range.

Risks to Our Call

Failure to secure more corporate and government projects and impairment costs.

Source: Kenanga Research - 25 May 2015