• MYR1.28 FV based on 18x CY24F P/E. Our FV also implies 9x CY24F EV/EBITDA. REDtone Digital is set to book record earnings by CY24, buoyed by a surge in tower deliveries and a potential tender win. Its solid telco services, along with potential new revenue from Starlink’s satellite broadband and operations & maintenance (O&M) contracts post tower delivery, should bolster recurring revenue. The Cloud and IoT division should also turn profitable on higher contracts secured. As the stock is trading at 5x CY24F EV/EBITDA, this presents a compelling investment opportunity.

• Expect record-high revenue from managed telco network services (MTNS) largely driven by the unique selling proposition from National Digital Network (JENDELA) Phase 1 (P1). Since JENDELA P1 began in 3Q20, REDtone received 46 towers cumulatively (out of the total 213 towers secured) from a Part 1 contractor up to 1QFY24 (Jun), with 20 fully deployed for revenue recognition. We anticipate c.100 towers to be deployed cumulatively, up to FY24. Its current orderbook stands at c.MYR698m, and includes a substantial portion of c.MYR500-600m from JENDELA P1, half of which is on a 5-year O&M contract. REDtone's tenderbook remains strong at MYR1bn, and includes several ICT projects. Presently, it is managing c.300 towers that generate income for the MTNS segment. Going forward, REDtone stands to benefit from the JENDELA P2 open tender in CY24.

• SpaceX partnership to drive telco services (TS) earnings. Its venture as an authorised Starlink reseller and integrator marks a strategic expansion in its telco offerings, and should boost its stable subscription-based revenue stream. Targeting key industries like airlines and cruises, REDtone leverages the growing global satellite internet market, which has a projected 2022- 2027 CAGR of 24.7% (as per data from Allied Market Research). In Malaysia, with over 26.69m internet users as of 2021 (DataReportal), the demand for reliable, high-speed connectivity is on the rise, particularly in the enterprise sector. This shift towards data-intensive services and technological advancement positions REDtone to capitalise on the move towards LEO Satellite Managed Internet Services in enterprise markets.

• Cloud & IoT segment to turn a profit. Being the largest smart farming solutions provider in Malaysia, REDtone is set to benefit from the Government's MYR6.17bn allocation for agriculture in Budget 2024, with a focus on enhancing crop yields through new technology-driven programmes. REDtone has implemented smart farming projects across c.200 sites as of 2Q23. This, on top of more IoT jobs that may be secured, should generate c.MYR10m in revenue, and position the unit for greater profitability.

• Valuation. We ascribe CY24F P/E of 18x to derive REDtone’s FV of MYR1.28 – justifiable, on its higher earnings growth rate (FY23-26F CAGR of 18.2%) and superior ROE. Key downside risks: Delay in telco towers delivery, competition risk, failure to secure new projects and the loss of key senior management personnel.

Source: RHB Securities Research - 5 Feb 2024