REDtone International Bhd
(Jan 13, 66.5 sen)

Maintain outperform at 64 sen with a target price of 81 sen: Puncak Semangat Sdn Bhd, controlled by tycoon Tan Sri Syed Mokhtar Al-Bukhary, has been named the successful bidder by the Malaysian Communications and Multimedia Commission (MCMC) to build, operate and manage the infrastructure for the digital terrestrial television broadcast (DTTB) service in Malaysia. It beat two other bidders, REDtone Network Sdn Bhd and i-Media Broadcasting Solutions Sdn Bhd. The concession is for a period of 15 years (from the date of award) including simulcast and implementation period.

While the news appears to be unfavourable to REDtone International at first glance, the group could be better off by not securing the DTTB contract given that some of the key criteria (as set out in the earlier tender documents) have come in at the lower end.

These include the non-inclusion of the vital 695Mhz-742Mhz band — Puncak Semangat only has the right to use the 470MHz-694MHz frequency before and after the analogue switch off (ASO), instead of both frequency bands. Note that MCMC has allocated the 695MHz-742MHz band, which has a strong in-building mobile signal penetration capability, for high speed mobile broadband services post-ASO.

While the first roll-out of the DTTB service is projected to be in the third quarter of calendar year 2014 (3QCY14) in a few test areas, the full nationwide coverage is only expected to be completed by 2017 in contrast to the previous target of end-CY15.

Meanwhile, the communications and multimedia minister was recently quoted by the press as saying that the government will only end its analogue TV broadcast services by 2020. Based on our earlier understanding, the successful bidder can only commence billing charges after the ASO, thus making the return on investment a big challenge.

Following renewed approval from its shareholders, REDtone International started to execute its share buy-back account to reaccumulate its shares since last November. The group has, thus far, accumulated a total of 1.67 million shares with an estimated average price of 67 sen per share as of Jan 9.

The recent disposal of the remaining 35% shareholding held in its associate, REDtone Mobile Sdn Bhd (RMSB), to Theo Networks Sdn Bhd is expected to generate RM5 million in divestment gains for the REDtone group in financial year 2014 ending May 31 (FY14). 

Note that the group had earlier on Jan 3, 2012 divested its 65% stake in RMSB, whose main business is operating a mobile virtual network, and researching, designing, developing and commercialising the Voice over Internal Protocol customer premise equipment.

The rationale for the disposal is to enable the group to focus on its core business offerings as a total service solution provider to corporate, small and medium enterprise and government segments as well as the management and building of Wi-Fi networks.

It is confident of achieving 50% quarter-on-quarter growth in profit before tax for the second quarter ended Nov 30, 2013 of FY14, underpinned by the healthy growth of its core businesses, ongoing various government projects as well as the synergic benefits created under the network sharing and alliance agreement with Maxis Bhd. — Kenanga Research, Jan 10