REDtone International Berhad
Target Price: RM 0.70
Current Price : RM 0.625
1. 2QFY14 Results Highlight
In 2QFY14, while turnover only increased by 14.1% to RM30.45m. Both PBT and net profit jumped by 67.6% and 52.1% each to RM7.06m and RM6.04m.
The revenue growth was underpinned by the data and broadband services which grew substantially by 70% to RM17.11m in 2QFY14. This more than sufficiently offset the 10% decline in its voice business.
The growth trend of its data division was driven by the infrastructure sharing and alliance with Maxis and TM’s HSBB services as well as contribution from the MCMC’s Time 3 project.
Voice business continued its declining trend due to limited growth prospects from discounted call services and disposal of loss-making REDtone Mobile (distribution and selling of prepaid discounted call services to retail market in Malaysia).
The profitability was also aided by one-off disposal gain from the disposal of 35% shareholding in associate company, REDtone Mobile Sdn Bhd. Stripping out this exceptional gain, PBT would have declined by 51.2% in 2QFY14.
The turnover growth for 1HFY14 was driven mainly by its data business while its voice business continued to record lower turnover.
The improvement in profits was due to the growing data business and disposal gain.
2. Earnings Outlook
Future earnings prospects will be underpinned by recurring income from its current 4,500 WiFi hotspots, earnings contribution from the infrastructure sharing and alliance with Maxis and TM’s HSBB services as well as contribution from the MCMC’s Time 3 project to build, operate and maintain Radio Access Network (RAN) infrastructure in Sabah and Sarawak.
Further growth prospects will come from the launch of new products and services such as REDtone Fibre+, targeted at business broadband market for SMEs and enterprises.
In addition, leveraging on its track record and expertise as a data and broadband solution provider, REDtone stands a better chance in securing projects from the government for the roll-out of broadband projects. REDtone could also benefit from the initiatives to increase internet access in Sabah and Sarawak, increase internet coverage in rural areas and the roll-out of second phase of HSBB project in sub-urban areas.
3. Valuation and Recommendation
We have downgraded our earnings forecast by 10% to factor in the lower profitability of voice business. We are maintaining our HOLD recommendation on REDtone. The stock is currently trading at a P/E of 13.3x for FY14.