Redtone International Bhd
(Dec 10, RM0.72)
Maintain “market perform” with an unchanged target price (TP) of 77 sen. Redtone  announced its wholly-owned subsidiary Redtone Marketing Sdn Bhd had received the letter of award from Malaysian Communications and Multimedia Commission (MCMC) to build, operate and maintain radio access network (RAN) infrastructure in rural areas in Sarawak and Johor as part of MCMC’s Time 3 (T3) programme.

MCMC’s RAN’s T3 phase 3 programme is aimed at further providing voice and data connectivity in rural areas of the country. The contract value is worth RM88.572 million and targeted to be completed in 2017.

We are positive on the long-awaited T3 extension project award given that the contract is expected to contribute positively to the group’s financial year 2015 (FY15) to FY17 earnings. Assuming an earnings before interest and tax (Ebit) margin of 35% (similar to the T3 project awarded in 2012), the project is expected to contribute RM31 million to the group’s earnings during the contract period.

We understand that there are approximately 83 sites to be built under the T3 extension contract of which about 70 sites are located in Sarawak. Redtone is expected to resolve the qualified opinion expressed by its external auditor for FY14 accounts in the coming weeks. The amounts are recoverable following a series of project awards and we believe this will be positive. To recap, Messrs Crowe Harwarth, the company’s external auditors, have expressed a qualified opinion in their report in respect of a debt owing by a third party that stood at RM15.6 million for FY14, ended May 31.

Other near-term catalysts include: i) synergistic benefits that could be created under the network sharing and alliance agreement with Maxis Bhd; ii) continuous government and corporate data-related projects (that is teleradiology and healthcare solutions) and iii) transfer to Main Board listing.

There is no change in our earnings forecasts for now given that management has yet to finalise the project recognition schedule. Having said that, we believe there is some room for us to upgrade FY15 earnings forecast as we have only imputed RM30 million new contracts in our financial model.

Maintain TP at 77 sen based on an unchanged FY15 targeted price-earnings ratio of 14.5 times (+0.5SD). Risks include failure to secure more corporate and government projects and impairment arises. — Kenanga Research, Dec 10

This article first appeared in The Edge Financial Daily, on December 11, 2014.