Redtone ...Sep12

Its poor financial performances were partially contributed by its non-core and loss-making subsidiaries. Followed the completion of the divestment of a number of its non-core and loss-making subsidiaries, Redtone's total selling, general and administrative (SG&A) expenses are expected to be lower by 10% year-on-year to RM36mil in financial year ending May 31, 2013 (FY13).

Going forward, the group's FY13 bottom line however, is still expected to underperform due to persisting high operating costs and stiff competitions. Expect Redtone to narrow its net loss to RM3.2mil in FY13 from RM8.7mil core net loss (ex-deconsolidation gain of RM10.9mil) a year ago, based on the existing businesses.

The infra and spectrum sharing agreement (NSA agreement) signed by Redtone and Maxis Bhd is expected to benefit both parties. The combined spectrum will allow both companies to offer the fastest 4G broadband speed across the country of up to 150Mbps. While Maxis is expected to benefit from the enlarged spectrum capacity, Redtone on the other hand is expected to have significant cost-savings on capex of about RM390mil.

The NSA agreement will allow both parties to maximise the usage of the scarce combined 2.6GHz spectrum, albeit the respective apparatus assignment for the 4G spectrum have yet to be assigned by Malaysian Communications and Multi-media Comission. In return, Maxis will pay Redtone an upfront payment in FY13 followed by a series of payments over the next 10 years.

Redtone is expecting the recurring income (from Maxis) to boost its financial performance significantly.

In view of the company's bottom line still expected to post a loss in FY13, Redtone is likely to be fairly valued at its net asset per share of 18 sen. Nevertheless, should the “Maxis factor” into the financial model; Redtone's FY13 is expected to record a net profit turnaround of RM21.1mil. This will provide a strong rerating catalyst for the stock.