REDtone’s digital service business set to stop bleeding

This article first appeared in The Edge Financial Daily, on August 26, 2019.

Lau believes Flexicraft would grow at a 40% compound annual growth rate over the next five years. Photo by Sam Fong

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KUALA LUMPUR: REDtone International Bhd expects its loss-making industry digital service (IDS) business to turn around and help improve the group’s overall financial performance in the current financial year ending June 30, 2020 (FY20).

IDS is the only one among the group’s three business segments that is dragging the group’s profitability.

REDtone chief executive officer (CEO) Lau Bik Soon believes the group’s new virtual reality (VR) service, dubbed Flexicraft, is set to boost sales in the IDS segment.

“IDS is something new that we are building,” Lau told The Edge Financial Daily in a recent interview. “I believe with the launching of new services like Flexicraft, FY20 would be interesting for IDS. I do expect that we should be able to turn around for IDS and do better in FY20.”

“We are positive of our top line growth in FY20. We believe Flexicraft would grow at a 40% compound annual growth rate over the next five years. Because the market is still young, we are very positive for the IDS segment, particularly Flexicraft,” he added.

Lau said REDtone’s VR solution is capable of creating three-dimensional interactive virtual space for the group’s customers to interact with end users.

He said REDtone already has two clients — Royal Selangor International Sdn Bhd and Paramount Corp Bhd — using the new technology to market their products on their websites.

“We have just started this for about four months now. It is something new for the Malaysian market. We will spend some time to educate the market on how it can benefit them,” he said.

“For FY19, [VR business revenue] was not significant, because we just started, but for FY20 it would be a slightly more meaningful contribution,” he added.

For the 12-month period ended April 30, 2019 (12MFY19), REDtone’s IDS segment reported an operating loss of RM4.23 million, slightly lower than the RM4.85 million loss in the previous one-year period (FY18). The group recently changed its financial year end to June 30.

REDtone’s other business segments are telecommunications service and managed telecommunications network service (MTNS).

For 12MFY19, telecom service’s operating profit grew 36.2% to RM29.79 million from RM21.88 million in FY18, while MTNS returned to a profit of RM4.75 million from an operating loss of RM7.69 million.

In terms of external revenue, REDtone’s telecom service grew 1% to RM82.3 million in 12MFY19, from RM81.49 million in FY18, while MTNS revenue more than doubled to RM94.44 million from RM31.06 million. Meanwhile, external revenue for IDS in 12MFY19 dropped 60% to RM2.18 million, from RM5.53 million in FY18.

Although Lau acknowledged that the telecom industry would remain competitive moving forward, he expects the group’s revenue for telecom service and MTNS to continue to grow.

“This is a very competitive market, but I believe that we have the strength and niche to be able to compete and continue our growth in these two segments,” he said.

Under telecom service, Lau said REDtone provides its corporate customers secured connectivity tailored to their business needs.

“For telecom service, we are an integrated telecom service provider, meaning to say we don’t just give customers one type of connectivity. We can bundle connectivity that the customer wants, and that is how we differentiate ourselves.

“Every company requires Internet line, and fixed line phone, so we provide managed network to corporate customers, meaning we provide a secured connection, hacking mitigation services,” he explained.

In the area of MTNS, Lau said REDtone is strong at optimising equipment for telecom infrastructure in the rural areas.

“We are very good at doing infrastructure in rural areas. We don’t do tower, we only build and manage the electronics. There are two types of business models. One is at the commercial front where the mobile operator will buy equipment from people like Huawei and Ericsson. They own the equipment, but they need to get someone to instal and optimise, which is what we do.

“The second model is related to the MCMC’s (Malaysian Communications and Multimedia Commission) projects in the rural areas. We will go there and put up all the equipment, optimise them and establish connection with all the mobile operators, so that users there can have the mobile operators’ services,” he said.

“With all these niche and strength, I believe these two segments will continue to grow. We are the largest in terms of Wi-Fi infrastructure builder. We are also one of the largest as engineering mobile service companies,” he added.

While it remains to be seen if REDtone would perform to Lau’s aspirations, the group’s shares seem to be attracting higher investor confidence since the beginning of this year.

Year to date, the counter has more than doubled in value to 39 sen last Friday, with a market capitalisation of RM292.18 million.