Record high profit in the making for REDtone

Record high profit in the making for REDtone
Business & Markets 2013
Written by Kenanga Research
Wednesday, 15 May 2013 10:26


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REDTONE INTERNATIONAL BHD []
(May 14, 45 sen)
Maintain outperform at 45.5 sen with a target price of 56 sen: Its recent collaboration with TELEKOM MALAYSIA BHD [] in wholesale ethernet has allowed REDtone to further enrich its data network TECHNOLOGY [] portfolio.

The group is now able to integrate different technologies, customise solutions and offer broadband on demand to cater for the needs of different industries and end-users (mainly small- and medium-sized entreprises). Its data network technologies include Metro-E, HSBB, WiFi, 4G, data centre and voice services.

Management indicates that the group is finally set to receive its first resource sharing fee from Maxis Bhd in May, after much delay in getting approval from the authorities due to technical issues.

Although the exact quantum was not disclosed, we estimate that Maxis could pay up to RM25 million based on our channel checks with the other industry players. The one-off fee is expected to boost the group’s 2013 financial year (FY13) earnings significantly and meet our net profit estimate of RM23.6 million (a hike of about 10-fold year-on-year).

To recap, in July 2012, REDtone entered into an infrastructure and spectrum sharing agreement (NSA agreement) with Maxis to fast track both the companies’ 4G LTE services rollout.

The NSA agreement with Maxis will not only provide vast synergies to the group (in terms of capital expenditure savings) but also enable it to receive a sustainable recurring income from the combined 2.6GHz 4G spectrum over the said period.



Our understanding is that the recurring income will be based on an agreed tier pricing structure for each Maxis 4G subscriber using the LTE service under the combined spectrum.

To date, Maxis has signed up 100,000 4G customers within the Klang Valley and will extend its service to Johor and Penang in the second quarter of the 2013 calendar year. In view of the current small contribution, we have yet to impute the above earnings into our financial model.

In November 2012, REDtone was awarded a three-year RM82.5 million USP (Universal Services Provider) project from the Malaysian Communications and Multimedia Commission to build, operate and maintain RAN (Radio Access Network) infrastructure to provide voice and data connectivity in nine rural areas in Sabah.

The recent attack by Sulu intruders in Sabah’s east coast has caused a delay of one to months in the CONSTRUCTION [] of 22 sites (out of the total of 75 sites in the nine rural areas) in Lahad Datu, which the group had initially targeted to complete by May 2013. Management believes the earnings impact is immaterial given that the intrusion was unexpected and it should thus be able to get a waiver from any penalty imposed by the authority. — Kenanga Research, May 14


This article first appeared in The Edge Financial Daily, on May 15, 2013.

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