Redtone (RIB) is expected to report yet another lacklustre report card in view of the continued deferment of it's Time 3 (T3) project. Despite management remaining hopeful to resume the project in 3QFY16, there are no solid indications so far. The group is planning to change its auditor in the upcoming AGM and apply to transfer its listing status to the Main Market. However, the plan could be a ‘non-event’ as RIB may require more time to comply with one of the listing transfer requirements. Coupled with the string of negative earnings surprises, we decided to cease coverage on RIB. Our previous TP of RM0.61 implies 16.8x PER valuation on its FY16 earnings.

Another headwind ahead. RIB is likely to report another uninspiring 2Q16 results in view of another deferment on its T3 extension project billing recognition, marking the fourth consecutive quarters of delay since it was awarded. Despite management’s assertion that it has fulfilled its portion under the project, the group had failed to recognize the billing as a result of a dispute following the change of key personnel in the authorities. Despite RIB remaining hopeful to resume the project in 3Q, there is no clear indication from the authority thus far. To recap, RIB has secured RM88.6m worth of contracts (accounted for c.10% of jobs under the first phase of the T3 extension project) under the MCMC’s Universal Service Provider (USP) scheme in late CY14. The project is to build, operate and maintain radio access network (RAN) infrastructure in rural areas in Sarawak and Johor with an aim to further providing voice and data connectivity in those areas.

Change in an auditor. Followed the retirement of the current auditor - Messrs Crowe Horwath, the group is planning to seek shareholders’ approval to appoint Messrs Ernst & Young as its new auditor in the upcoming AGM in 19-November. Key rationale for the changes is to align with its major shareholder, Berjaya Corp Bhd (BCorp), which has appointed the latter as its auditor. Meanwhile, we also do not discount, to a certain extent, that the changes may be triggered by the dispute arising from the previous financial year account where the former issued a qualified opinion despite management having a different view.

Transfer of listing plan may need to be reviewed. RIB is keeping to its target of submitting the transfer of listing (to the Main Market) application post the release of its FY15 audited account and AGM. We, however, are taking a more conservative view and believe the plan may need to be reviewed as the group may fail to comply with one of the healthy financial position requirements under the SC’s equity guideline, whereby an applicant must have a positive cash flow from operating activities, if listing is sought under the profit test and market capitalisation test. Note that RIB has reported a minus RM35.5m net operating cashflow in its FY15 audited account.

Corporate's exercises on the cards? RIB has gradually stayed low profile since the completion of the general offer in 1H15. There were no corporate exercises despite the emergence of Sultan of Johor and BCorp as major shareholders. Nevertheless, there is a likelihood the current structure may be ripe for a review as the group’s major shareholders are exploring various opportunities to enhance shareholders’ value. While management refused to elaborate more on the issue, we do not discount that it could involve UMobile due to their common shareholder status. 

Source: Kenanga Research - 12 Nov 2015