REDtone - Commotion in Sabah east coast

News  The media reported that security forces have been holding off armed Sulu intruders in Kg Tanduo, Lahad Datu and in an additional two new areas of Semporna and Kunak in Sabah’s east coast.

 Eight policemen and six gunmen were also reported killed in the latest gunfight in Kg Seri Jaya Simunul, Semporna.

Comments  The current attack by Sulu intruders in Sabah’s east coast may potentially cause Redtone to defer its USP project progression in the short term.

 To recap, Redtone had been awarded a 3-year USP project from MCMC in November last year RM82.5m to build, operate and maintain RAN (Radio Access Network) infrastructures to provide voice and data connectivity in nine rural areas in Sabah. The RAN infrastructure will be located at Tongod, Lahad Datu, Beluran, Kinabatangan, Beaufort, Kuala Penyu, Papar, Sipitang and Tenom. (Please refer overleaf for the detail locations)

 Under the abovementioned USP project, we understand that Redtone needs to complete to build a total 75 sites (out of which 22 sites will be located in Lahad Datu) by May 2013. Any deferment in the targeted completion date may lead the group to experience some delays in its revenue recognition according to management.

 Nevertheless, management believes that any deferment in the USP project revenue recognition will be neutralised by its upcoming spectrum resource sharing fee.

Outlook  REDtone’s near term catalysts will be mainly led by the RM82.5m USP project as well as its upcoming RM25.0m spectrum resource sharing fee.

 The group’s future earnings are likely to depend on: 1) the ability to secure more USP projects and 2) the degree of aggressiveness of Maxis’ 4G LTE services rollout, which we have yet to impute into our financial model.

Forecast  There are no changes in our FY13-FY14 earnings forecasts.

Rating    Maintain OUTPERFORM

 We believe that investors have overlooked the potential earnings upside of REDtone in both FY13 and FY14. We expect the group’s net profit to reach RM23.6m (more than a 10-fold YoY jump) in FY13 and thereafter RM25.0m (+6.0% YoY) in FY14.

Valuation  We are maintaining our Target Price at RM0.56 based on an unchanged targeted FY13 PER of 11.0x.

Risks  Dependency on a major partner – Maxis.

 Failure to secure more USP programmes.

Source: Kenanga