With its recent team-up with Telekom Malaysia in wholesale Ethernet, the group is now capable of offering a complete customised and integrated data network technology solution to its customers in different industries. The group is also set to receive its first resource sharing fee from Maxis in May. The fee is expected to boost REDtone’s FY13 earnings significantly and reach our targeted net profit forecast of RM23.6m (~10 fold YoY) on a full-year basis. In addition, the group is also set to receive a sustainable recurring resource sharing fee under its NSA agreement with Maxis. Separately, management believes that the recent Sabah Sulu incident will not have any material earnings impact to the group. There are no changes to our REDtone’s FY13-FY14 earnings forecasts. We maintain our OUTPERFORM call on REDtone with an unchanged target price of RM0.56, based on a targeted FY13 PER of 11.0x.

A complete data network technology solution portfolio. Its recent team-up with Telekom Malaysia in wholesale Ethernet has allowed REDtone to further enrich its data network technology portfolio. The group is now able to integrate different technologies, customise solutions and offer broadband on demand to cater for the different industry and end-user needs (mainly the SME customers). Its data network technologies include Metro-E, HSBB, WiFi, 4G, data centre and voice services.

On track to achieve a record-high profit. Management indicates that the group is finally set to receive its first resource sharing fee from Maxis in May after months of delay in getting the authority’s approval due to technical issues. Although the exact quantum was not disclosed, we estimate that Maxis could potentially pay up to RM25m based on our channel checks with the other industry players. The one-off fee is expected to boost the group’s FY13 earnings significantly and meet our net profit estimate of RM23.6m (~10 fold YoY). To recap, REDtone had in July 2012 entered into an infrastructure and spectrum sharing agreement (NSA agreement) with Maxis to fast track both the companies’ 4G LTE services rollout.

A sustainable recurring resource sharing fee is on the cards. The NSA agreement with Maxis will not only provide vast synergies to the group (in terms of capex saving) but also enable it to receive a sustainable recurring income from the combined 2.6GHz 4G spectrum over the said period. The recurring income, based on our understanding, will be based on an agreed tier pricing structure for each Maxis 4G subscriber who is using the LTE service under the combined spectrum. To date, Maxis has signed up 100k 4G customers within the Klang Valley and will extend its service to Johor and Penang in 2QCY13. In view of the current small contribution, we have yet to impute the above earnings into our financial model.

Immaterial earnings impact from Sulu incident. The recent attack by Sulu intruders in Sabah’s east coast has caused 1-2 months delay in constructing 22 sites (out of the total 75 sites in nine rural areas) in Lahad Datu, which the group had initially targeted to complete by May 2013 under its USP project. Management believes the earnings impact is immaterial given that the above occasion was an unexpected social incident and it should thus be able to get a waiver from any penalties by the authority. To recap, Redtone was awarded a 3-year RM82.5m USP project from MCMC in November 2012 to build, operate and maintain RAN (Radio Access Network) infrastructures to provide voice and data connectivity in nine rural areas in Sabah.

Source: Kenanga