REDtone International - New Growth Era

We are initiating coverage on REDtone Berhad (“REDtone”) with an OUTPERFORM recommendation and a target price of  RM0.56, based on targeted FY13 PER of 11.0x. REDtone, an integrated leading telecommunication solution service provider, is expected to receive a handsome resource sharing fee and a series of recurring incomes from Maxis under its 10-year NSA  agreement. Meanwhile, the recent awarded of RM82.5m 3-year USP project is also expected to contribute positively to the group’s earnings going forward via various cost synergies. All in all, we expect the group’s FY13 net profit to reach RM23.6m (more than a 10-fold jump YoY) and thereafter to RM25.0m (+6.0% YoY) in FY14. 

The “Maxis factor”. The recent 10-year infrastructure and spectrum sharing agreement (NSA agreement) with Maxis could  provide vast synergies to the group, in our view, as REDtone will now be able to ride on Maxis’ network as well as launching its data services through the combined 2.6GHz spectrum. Apart from having a significant and immediate capex saving of approximately RM390m (which it would otherwise need to fork out to cover 50% of the country’s population), the group is now set to receive a sustainable recurring income when its 4G LTE take-up rate starts to rise. We understand that REDtone is scheduled to receive its first resource sharing fee from Maxis in early CY13 under the NSA agreement. Although management is reluctant to disclose the exact quantum, we estimate that Maxis could potentially pay up to RM25m based on our channel checks with other industry players. We also understand that under the above NSA agreement, both parties will need to pay an unidentified amount to each other when a user subscribes for Maxis or REDtone’s 4G LTE services under the combined 2.6GHz spectrum. 

Bags USP program worth RM82.5m in Sabah. REDtone was awarded a RM82.5m USP contract from MCMC in last November to build, operate and maintain RAN infrastructures in nine rural areas in Sabah. The 3-year USP contract is a major win for REDtone and will help to drive the group’s earnings for the next three financial years. We understand that approximately RM49.5m or 60% of the contract value has been allocated to build 75 sites in the nine rural areas while the balance was assigned for maintenance purpose. No earnings guidance was provided by the management, but we estimate that the group could potentially generate a 25%-35% cost synergy as a result of the larger economic of scale.  

Approved a minimum payout ratio of 25% as a dividend policy. The group has not rewarded its shareholders via dividend distribution since midCY06 due to a prolonged period of weak financial results. Nevertheless, in view of its now expected strong and sustainable earnings from FY13 onwards, REDtone had on yesterday approved a minimum payout ratio of 25% of the group’s net profit as a dividend policy  for the company. By assuming a 30% dividend payout ratio, we estimate that the group could potentially distribute 1.3 sen dividend per share each in both FY13 and FY14, implying decent dividend yields of 3.6%-3.8%.   

Future catalysts. While REDtone’s near term catalysts will be mainly led by the RM82.5m USP project as well as the RM25m spectrum resource sharing fee, its 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 the latter event into our model.    

Source: OSK