KUALA LUMPUR, April 30 ― REDtone International Bhd says it thinks data and broadband services will propel its profit in FY14, while the voice business is the group's “cash cow”.
REDtone International ― a mobile virtual network operator (MVNO) ― aims to grow its data and broadband services by actively tendering for projects in the government sector, telecom industry and securing small and medium enterprise customers.
It says profits over the next 10 years will be strengthened by its Network Sharing and Alliance Agreement with Maxis Broadband Sdn Bhd.
It is also upbeat about the collaboration on high-speed broadband services with Telekom Malaysia.
In its outlook statement, REDtone International highlights “limited growth prospects” from the voice business and distribution of prepaid and recharge services in China.
The company just announced earnings for Q3 FY14:
Revenue: +1 per cent to RM40.9 million
Profit: +28 per cent to RM5 million
Other income: RM0.7 million vs RM0.6 million
Cash flow from operations: (RM8.3 million) vs RM19.3 million
Dividend: Nil
Order book: Not disclosed
Overall revenue was marginally higher due to an increase in data revenue.
Profit grew due to a more than 30 per cent drop in tax provisioning.
Investor Central. We keep your investments honest.
1. Why did tax costs rise ten-fold?
According to page 3 of its Q3 earnings report, REDtone International paid RM6 million tax in the first nine months of FY14.
That's about 10 times of RM0.6 million tax paid in the first nine months of FY13.
One of the reasons could be RM5 million in proceeds from the sale of a 35 per cent in REDtone Mobile Sdn Bhd.
But then, how much tax did it pay on that?
2. When did it sell that 35 per cent stake in REDtone Mobile Sdn Bhd?
On December 3, REDtone International announced an agreement to sell its entire 35 per cent stake in REDtone Mobile Sdn Bhd for RM5 million to Theo Networks Sdn Bhd.
But in its Q3 earnings report (page 11), REDtone International says it recorded a profit of RM5 million on the above sale in its earnings report for Q2 ended November 30.
That makes us wonder how it could have recorded a profit on the sale of a 35 per cent stake in REDtone Mobile in its Q2 earnings report when the agreement was signed and announced only in Q3.
Had it not booked the gain in Q2, REDtone International would have recorded a 26 per cent QoQ drop (instead of a reported 69 per cent rise) in pre-tax profit during that quarter.
3. How much did it pay for a 35 per cent stake in REDtone Mobile?
REDtone Mobile Sdn Bhd used to be a wholly-owned subsidiary of REDtone International before it sold a 65 per cent stake to Mr Teh Beng Hock and Mr Tee Yew Yaw for RM1 in January 2012.
In its announcement back then, REDtone International revealed that REDtone Mobile had net liabilities of RM2.6 million and accumulated losses of RM3.2 million on May 31, 2011.
So, it appears it sold net liabilities of REDtone Mobile for just RM1.
That would explain why REDtone International recorded an accounting gain on disposal of a controlling stake in REDtone Mobile in FY12 (refer page 90 of its FY12 annual report).
Also during FY12, REDtone Mobile was reclassified as a 35 per cent-owned associate of REDtone International.
And according to page 69 of its FY12 annual report, “quasi loans” on REDtone International's books increased by RM3.7 million during the year.
Quasi loans represent the payments made by REDtone International on behalf of its associates.
The settlement of such loans is 'neither planned nor likely to occur in the foreseeable future'.
In other words, these loans are a part of REDtone International's net investment in its associates.
During FY12, a simultaneous increase of RM3.7 million in quasi loans along with the reclassification of REDtone Mobile as an associate suggests the loans represent REDtone International's investment in it.
We have no other way to find that out as REDtone International's annual reports don't mention the break-down of quasi loans to various associate companies.
Now that REDtone International has recorded the entire proceeds of RM5 million as gain on disposal of a 35 per cent stake in REDtone Mobile, it seems REDtone International didn't extend any quasi loans to REDtone Mobile.
REDtone International recorded a RM5 million gain on disposal of a 35 per cent stake in REDtone Mobile for RM5 million.
In other words, REDtone International's investment in REDtone Media was negligible.
That makes us wonder why someone would pay RM5 million for a 35 per cent stake when the seller didn't invest a penny in it.
Or, has REDtone International not written-off the quasi loans, if any, it extended to REDtone Media?
In short, what is its cost of investment for a 35 per cent stake in REDtone Mobile?
4. What was the net worth of REDtone Mobile on December 3?
Less than two years after it sold a controlling stake in REDtone Mobile for just RM1, REDtone International sold the remaining 35 per cent stake for RM5 million.
It seems REDtone Mobile made a phenomenal turnaround during that period.
Therefore that makes us curious about REDtone Mobile's net asset value at the time of disposal of a 35 per cent stake on December 3.
5. Who are the shareholders and directors of Theo Networks Sdn Bhd?
Mr Teh Beng Hock and Mr Tee Yew Yaw already owned a 65 per cent stake in REDtone Mobile.
They bought it for RM1 but now that is worth at least RM9.3 million (based on RM5 million for a 35 per cent stake).
So, were Mr Teh Beng Hock and Mr Tee Yew Yaw not interested in buying the remaining 35 per cent stake in REDtone Mobile?
Or, was Theo Networks Sdn Bhd acting on their behalf?
Who are the shareholders and directors of Theo Networks Sdn Bhd?
Unfortunately, REDtone International didn't reveal the background of Theo Networks Sdn Bhd as it is not mandatory to do so as per the listing rules of Bursa Malaysia.
However, it could have done so voluntarily.
6. Why did it sell a controlling stake in REDtone Mobile for a single ringgit in January 2012?
If Theo Networks Sdn Bhd paid RM5 million for a minority stake in December last year, why couldn't REDtone International demand a higher price from Mr Teh Beng Hock and Mr Tee Yew Yaw for a majority stake in January 2012?
7. Why did it exit REDtone Mobile in a hurry?
According to a recent news report, REDtone Mobile ― a postpaid MVNO ― is aiming to have a million subscribers in the next two years.
REDtone Mobile, now known as RedOne Mobile, is hopeful of an IPO in 2016.
It also aspires to expand to Thailand and the Philippines.
Apparently, REDtone Mobile is growing fast.
Then, why did REDtone International exit the company for just RM5 mln plus one ringgit?
8. Where did its quasi loans to associates go?
REDtone International had investments in associates through quasi loans of RM23 million on May 31 last year (refer page 44 of FY13 annual report).
But in its Q1 FY14 earnings report, all of the quasi loans suddenly disappeared from the balance sheet on August 31.
Simultaneously, it recorded a maiden RM25.4 million worth of “intangible asset”.
In the absence of any further clarifications in its Q1, Q2 and Q3 earnings reports, we wonder if the quasi loans to associates were reclassified as “intangible assets” on REDtone International's balance sheet.
If yes, why wasn't the reclassification made in the FY13 annual report?
And if that not the case, where did the quasi loans go?
9. Why has 'intangible assets' increased by RM2.4 million?
If the “intangible asset” on its balance sheet represent the quasi loans to associates, why did it increase by RM2.4 million in the first nine months of FY14?
Does it mean REDtone International made fresh quasi loans to the associates?
If yes, which associates were the beneficiaries?
10. What is the break-down of its quasi loans to associates?
As already highlighted earlier, REDtone International's FY13 annual report (page 72) doesn't tell us which associates the quasi loans were paid to.
In other words, the shareholders don't know which associate owes how much to the company.
So whenever it sells an associate, as it has done on a few other occasions in recent years, the shareholders can only wonder what REDtone International's investment in it was.
And now the quasi loans have been, most likely, reclassified as “intangible assets” on REDtone International's balance sheet.
That suggests the companies which owed those quasi loans to REDtone International are no longer its associates.
To clear the air surrounding the confusion on quasi loans, can we please have an associate-wise break-down?
11. Who sold it a 56 per cent stake in Shanghai Xin Chang Information Technology Company Limited?
REDtone International bought a 56 per cent stake in Shanghai Xin Chang Information Technology Company Limited for RM2.6 million on January 28.
Registered in China, Shanghai Xin Chang Information Technology Company Limited is in the business of marketing and distribution of internet phone call and discounted call services.
In its announcement, REDtone International didn't reveal who sold it a controlling stake in Shanghai Xin Chang Information Technology Company Limited.
While the listing rules don't require it to disclose the seller's details, shareholders would certainly like to know more about the seller.
Also, how did REDtone International get to know about the seller's offer? Who brought them together?
12. Why did it acquire only a 56 per cent stake?
Along with the details about the seller, shareholders would also be curious to know why REDtone International bought only a 56 per cent stake in Shanghai Xin Chang.
Why not buy it out completely?
And who owns the remaining 44 per cent stake in it?
13. What was the net worth of Shanghai Xin Chang Information Technology Company Limited?
REDtone International didn't disclose the basis on which it agreed to dole out RM2.6 million for a 56 per cent stake in Shanghai Xin Chang.
In the absence of any information, we can only wonder what Shanghai Xin Chang's net worth was on January 28.
We have sent these questions to the company ([email protected]) to invite them for an on-camera interview, and/or seek their written response.
So far, we have not had a reply (which is why you are seeing this message). ― Investor Central
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