Thursday 28 Mar 2024
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BERJAYA CORP BHD (BCorp), controlled by Tan Sri Vincent Tan, has been accumulating shares in ACE Market-listed REDtone International Bhd.

The diversified group’s equity interest is now at 30.77% — not that far from the 33.3% threshold, which would trigger a mandatory general offer — from 13.84% as at October last year.

Meanwhile, Tan owns a 1.3% stake.

The share purchase has renewed talk that the tycoon may be seeking a backdoor listing for U Mobile Sdn Bhd, in which he has a 44.67% direct stake. Other shareholders of U Mobile are Singapore-based Straits Mobile Investments Pte Ltd with a 49% stake and Magnum Bhd, with 6.33%.

REDtone group CEO Lau Bik Soon tells The Edge that he does not know whether Tan has any merger and acquisition (M&A) plan.

Lau says he can’t speak for Tan, but he sees BCorp’s move as a sign of “showing confidence” in REDtone.

“After three consecutive years of profitability, one of the biggest challenges is to ensure sustainability. The last 12 months were really exciting for us because we saw our other pillars of service, apart from our traditional voice and data business, moving toward maturity,” says Lau.

He hints that REDtone is aiming to triple its revenue for the financial year ending May 31, 2017 (FY2017) from last year’s RM141.76 million.

It achieved a net margin of 15.64% in FY2014, translating into a profit of RM22.17 million or earnings per share of 4.42 sen. On gross and pre-tax levels, the margins stood at 41.85% and 19.34% respectively.

Three-year, four-pillar core business plan

While others may be speculating about the change Tan will bring to REDtone, Lau is confident of the company’s fundamentals and growth prospects. He says it has “four core pillars of business” mapped out to grow itself in the coming three years.

If REDtone’s earnings grow within the next three years as planned, BCorp’s investment in the telecommunication company would be a lucrative one.

According to data from The Edge Research, the telco’s trailing 12-month price-earnings ratio was 16.4 times, against the 20 times or more of other listed telcos such as DiGi.Com Bhd and Maxis Bhd.

However, analysts say REDtone is fairly valued based on last Friday’s close of 73.5 sen as the company has not been able to win new government contracts and the growth of its voice and data services division may have peaked.

Kenanga Investment Bank has retained a “market perform” rating on the stock for the last five months with a target price of 77 sen. It says it will only revise the target price when REDtone wins more government jobs.

Last month, the company won an RM88.57 million contract from Malaysian Communications and Multimedia Commission (MCMC) for the radio access network infrastructure in Sarawak and Johor as part of the regulator’s Time 3 extension programme. But this was not enough to impress analysts.

Still, Lau is confident that the group will be able to secure more projects for telecom infrastructure management, claiming that very few organisations have the level of skill that REDtone has.

The group also has a RM1 billion tender book, which involves more than the infrastructure business. Its value-added services segment includes teleradiology services and the Internet of Things (IoT) business, which collates real-time data of heart rates or air humidity, for example, for a particular client’s monitoring purposes.

Lau says the group has “virtually no competitor” in the local IoT market.

One analyst says securing jobs from the government for its value-added services segment could be the next catalyst for REDtone.

While the company’s voice and data services segment has reached the RM100 million sales mark, Lau says it is targeting to have the revenue of its three other segments reach the same mark in the next three years.

“Eventually, we hope that all four segments will contribute to revenue almost evenly within three years.” This would result in annual sales of RM400 million.

According to Lau, REDtone’s biggest earnings growth driver is its infrastructure management division.

Possible M&A with U Mobile?

Apart from shares, BCorp holds 128.48 million irredeemable convertible unsecured loan stock and 20.1 million warrants in REDtone.

Should the diversified group convert all the REDtone derivatives it owns, back-of-the-envelope calculations show that BCorp would hold 316.17 million shares or 46.92% equity interest in REDtone’s enlarged share base. This would make it the largest shareholder.

Last September, U Mobile CEO Wong Heang Tuck revealed that the telco was looking to spend RM1.5 billion for network expansion. With its shareholders’ funds at RM348.47 million and total liabilities of RM676.71 million, it seems like the highly geared telco needs fresh capital.

A listing status would be useful for a fundraising exercise.

U Mobile has continually shot down listing rumours. One listing criteria is that a company must record profits for three to five financial years.

The telco has been in the red for at least five years with a net loss of RM363.24 million in FY2013, although that was 18% lower than the previous year’s loss of RM444.44 million. Revenue, meanwhile, almost doubled to RM919.17 million.

Wong told the press last month that the telco still had negative earnings before interest, taxation, depreciation and amortisation of some RM200 million in FY2013, although he was confident of halving it in FY2014.

However, a market observer says U Mobile may not need to meet the profitability requirement if its assets are injected into a listed company “like, say, REDtone, if the listed company’s profit can offset U Mobile’s losses”. The M&A would then require shareholders’ and MCMC’s blessing, among others.

REDtone has seen its earnings rising in recent years, but its net profit of RM22.17 million is still far too little to absorb U Mobile’s losses.

An analyst says merging REDtone with U Mobile would be counterintuitive as they lack synergistic benefits.

 

This article first appeared in The Edge Malaysia Weekly, on January 12 - 18 , 2015.

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