REDtone International Bhd
(Mar 30, 84 sen)
Recommend accept offer with a higher target price of 80 sen: REDtone International announced that it had received a conditional takeover offer from Berjaya Corp Bhd (BCorp) for the shares that the latter does not currently own.

The offer comprises a cash consideration of 80 sen each for the outstanding 64.16% of shareholdings and 32 sen for the outstanding 97.5 million irredeemable convertible unsecured loan stocks. The offer will be available for acceptance for 21 days.

The offer was received from Juara Sejati Sdn Bhd (JSSB), a wholly-owned subsidiary of Berjaya Group Bhd, which is in turn a wholly-owned subsidiary of BCorp, the ultimate offeror.

The mandatory offer was triggered subsequent to JSSB’s recent acquisition of a 10.53% stake in REDtone (from REDtone chairman Datuk Seri Syed Ali’s vehicle Tema Juara Sdn Bhd, TJSB), bringing the latter’s holding in the company to 35.84% or 238.54 million shares.

BCorp intends to maintain REDtone’s listing status. The offer price represents a 3.61% discount to REDtone’s last closing price of 83 sen and a 5.44% discount to its five-day volume weighted average market price.

The offer price also represents price-to-earnings ratio (PER) of 18.1 times and 3.09 times price-to-book value (P/BV) ratio, based on its financial year ended May 31, 2014 (FY14) audited account.

We believe the takeover offer was triggered by a technical general offer rather than a hostile takeover.

However, this offer is likely to lapse as the offer price is below its current market price. The offer price of 80 sen per share is 3.9% above our fair value of 77 sen (based on our FY15 targeted PER of 14.5 times) and 2.68 times of its first-half FY15 P/BV, which we deemed as fair based on our FY15 forecast.

Thus, there is no harm for short-term investors and/or traders to take this opportunity and exit the company.

Having said that, we advocate long-term investors to continue holding the shares given the recent emergence of two strong major shareholders (Sultan of Johor and Berjaya Group), suggesting that some interesting corporate exercises could be in the making.

The market earlier speculated that it could involve U Mobile Sdn Bhd due to the common shareholder status.

Based on our back-of-the-envelope calculations, U Mobile’s market capitalisation could be worth up to RM861 million to RM18.5 billion if the group seeks public funding, and potential underestimation of the 2x10MHz of 2.6GHz spectrum value, which could be worth RM235 million to RM354 million, based on our earlier observation.

Thus, suggesting that the group’s current business is merely valued at RM178 million to RM297 million in market capitalisation, the implied P/BV ratio of 1.15 times to 1.93 times or 6 times to 10 times forecast FY15 PER, which we believe is undervalued. REDtone is currently bidding for a sizeable government data project which could change the group’s FY16 financial landscape if awarded.

All in all, we believe the abovementioned plans and/or catalysts will only materialise in the mid to long term. — Kenanga Research, March 30

This article first appeared in The Edge Financial Daily, on March 31, 2015.