Translate This Page

Wednesday, January 29, 2014

REDtone boosted by post-divestment synergies (Edge)

REDtone International Bhd
(Jan 28, 63.5 sen)
Maintained outperform at RM62.5 sen, with a target price of 81 sen. REDtone’s net profit for the second quarter of financial year 2014 ending May (2QFY14) of RM9.7 million (+62% year-on-year [y-o-y]) came in within expectation at 36% of our full year estimates (against 15.8%   in the first half [1H] of FY13). We understand the group will recognise more of its government projects worth RM82.5 million in the remaining quarters. Coupled with better economies of scale, this should bring its full-year net profit closer to our estimate of RM27.2 million. No dividend was declared as expected.

Y-o-y, 1HFY14 revenue advanced by 16% to RM66.6 million, mainly propelled by the strong contribution from its data segment (+85% to RM39.5 million), which was driven by various government projects as well as higher data and application revenue contribution. The group’s profit before tax (PBT) soared 92% to RM11.7 million due to the cost synergies created post-divestment of non-core and loss-making businesses as well as from the higher data revenue. The strong growth rate was partially offset by a tax deduction (instead of tax refund in the previous financial year) thus boosting its net profit by 62% to RM9.7 million.

Quarter-on-quarter, turnover decreased to RM30.5 million (16%) in 2QFY14 due to the lower data segment revenue, mainly caused by the absence of revenue contribution from the RM82.5 million government project. The group’s earnings before tax and interest improved by 45% to RM6.8 million, thanks to the RM5 million disposal gain arising from REDtone Mobile Sdn Bhd. Its PBT margin was also enhanced, to 23.2% (1QFY14: 12.9%; 2QFY13: 15.8%) due to larger economies of scale and higher data segment contribution.

We believe the failure to secure the recently announced digital terrestrial television broadcasting infrastructure contract may not necessarily be a negative given that some of the key parameters have come in at the lower end which may affect the project’s return on investment.

We raise our FY14 earnings forecast by 1.3% and FY15 by 1.8%. We have also realigned the number of shares to 507 million from 479 million previously. We roll over the valuation base year to FY15 but maintain our target price at 81 sen based on unchanged FY15 targeted price-earnings ratio of 14.5 times (+0.5 standard deviation). Risks to our call are dependency on sole major partner Maxis Bhd and a failure to secure more government programmes. — Kenanga Research, Jan 28

This article first appeared in The Edge Financial Daily, on January 29, 2014.

No comments: