Period

4Q15/FY15 Actual vs. Expectation

Below expectation. Redtone International (RIB) reported a PATAMI of RM11.4m in FY15 which is 34.7% below our expectation.

The disappointing FY15 was mainly due to the T3 extension project deferment (for a second consecutive quarter), equipment ordering lead time and technical configuration complications. Meanwhile, the increase in payroll and related costs (that was mainly caused by the project’s preparation) as well as expenses arising from ESOS and foreign-currency losses were also not sufficient to support the drop in data projects as a result of the project deferment.

On a separate note, we were surprised that the group has restated its FY14 audited accounts and made a provision for the impairment of a long outstanding debt owing (RM15.4m) by a third party given that management had guided for the external auditor set to accept its explanation earlier; thus no provision should be provided. The abovementioned provision reduced its FY14 PATAMI to RM7.1m from RM22.2m stated previously.

Dividends

No dividend was declared during the quarter.

Key Results Highlights

YoY, FY15 revenue climbed by 6% to RM150m, thanks to the higher contribution from its voice (+17% to RM65m) but partially offset by lower data revenue (-1% YoY to RM86m) as a result of the project deferment. The growth, however, was not sufficient to offset the higher costs (i.e. payroll and related OPEX) arising from the project preparation stage. Meanwhile, expenses from ESOS vested and exercised as a result of the takeover offer by Berjaya as well as foreign-currency losses also led the group to report a lower PATAMI of RM11.4m (-49% YoY prior or +60% after restatement of its FY14 accounts).

QoQ, turnover was lower by 19% as a result of another deferment on its T3 extension project, which led the data segment’s revenue to decline by 32%. Its PBT, meanwhile, plunged 95% as a result of the lower revenue and higher OPEX (which include ESOS-related cost and foreign-currency loss) incurred during the quarter.

Outlook

Despite a disappointing FY15, management continued to remain hopeful for FY16, underpinned by its healthy order book of RM110m (which comprised of RM90m Universal Service Provision (USP) projects, and RM20m WiFi projects in various states). Meanwhile, we also understand that RIB is keeping its intention to seek for a transfer to Main Board listing by year-end.

Having said that, there is a likelihood the group may face another challenging quarter in 1Q16 as there is no solid progress in its T3 extension project as well as a potential shortened reporting period (where we understand that RIB intends to change its FYE to April to align with its parent Berjaya Corp’s reporting format).

Change to Forecasts

Post-results, we have slashed our FY16E revenue/net profit by 23% each to RM198m/RM30.5m, to reflect the latest USP projects' implementation timeline post the deferment. Having said that, in view of the change in the ministry of Communication and Multimedia in the recent cabinet reshuffling, we do not discount that these USP projects may face yet another deferment moving forward.

On the flip side, we understand that RIB is working on some sizeable projects (i.e. teleradiology & healthcare solutions), which could strengthen its prospect, if successful. Despite management remaining fairly optimistic, we have yet to factor in any contribution into our financial model.

Rating

Downgraded to MARKET PERFORM

Valuation

We have lowered our RIB fair value to RM0.71 (from RM0.87 previously), based on the targeted FY16E PER of 15.2x (a 30% discount to the big cap telco’s FY16 PER, in-line with its 3-year historical 25%-30% discount range).

Risks to Our Call

Failure to secure more corporate and government projects.

Source: Kenanga Research - 3 Aug 2015