Saturday 20 Jul 2024
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This article first appeared in The Edge Malaysia Weekly on October 23, 2023 - October 29, 2023

REDtone Digital Bhd believes it has the key ingredients for successful digital transformation after decades in the industry, and is now ready to reap the fruit of its smart farming solutions business and turn it into a new growth engine.

Group CEO Lau Bik Soon says that over the past six years, the home-grown integrated telecommunications and digital services provider has been sowing the seeds of its future growth by providing an integrated Internet of Things (IoT) platform for agriculture players.

Since REDtone ventured into the smart farming business in 2017, the group has been working very closely with Malaysia Digital Economy Corporation (MDEC), the Ministry of Agriculture and Food Security and Department of Agriculture to address the challenges faced in food security, farm management, forest asset management, monitoring habitat loss and deforestation.

“Successful digital transformation, be it in agriculture or any other industry, is not possible without good connectivity within a secured network environment, as well as other back-end infrastructure. Being a telco and digital company, REDtone has all the right components to help its customers in their journey to digital transformation,” he tells The Edge in an interview.

“Today, we have a few hundred customers in our smart farming business segment. To us, this number is still small but growing. In fact, REDtone is already the largest smart farming solutions provider in the country, in terms of geographical footprint and customer base,” he states.

If a farmer has problems with lack of manpower or resources, for instance, REDtone can help increase the farm’s efficiency, as well as to better manage its use of IoT and technology, says Lau, who has three decades of experience in the information and communications technology and telecommunications industry.

“Through our system, we observed that a one-acre chilli farm, which traditionally requires two workers, can efficiently operate with just one. Generally, people are willing to spend as long as you can prove to them that your solutions work,” he says.

For cash-crop farms, he asserts that the application of various fertilisers is essential. When this process is not automated, it relies on manual labour. However, human moods and errors can sometimes lead to inaccuracies. On the other hand, when fertilisers are mixed using a machine, the precision is guaranteed, as machines operate without emotions, ensuring accuracy in the process.

“What we do is to provide IoT solutions directly to end-users. REDtone’s advantage is that it has every component needed in the whole value chain. Again, what is the most crucial part of smart farming? It is about connectivity. We are already in that business.

“And then, the data must go somewhere. Where does it go? It goes to the data centre. We are already in that business too. To provide total solutions to our customers, what we need to do is just integration,” he explains.

Lau, 52, was appointed to REDtone’s board in August 2008 and assumed his current position in July 2011.

According to him, unlike newcomers, REDtone does not have to make heavy investments as the group can just tap into its existing infrastructure, which makes its venture into smart farming relatively easier compared to other new entrants.

“Although smart farming looks like a new area, to us, we have all the components ready. We don’t have to start from scratch, so our cost of entry is lower. Ideally, we hope that our IoT and cloud division, which specialises in smart farming, can contribute about 20% to our group’s top line in the coming years,” he elaborates.

REDtone currently has three main business segments. Under its telecommunications services division, the group offers data, voice, managed services and cybersecurity services to government, enterprises, and small and medium enterprises.

Under its managed telecommunications network services (MTNS) division, REDtone can undertake building, maintaining and operating large-scale telecoms engineering projects, base stations and fibre infrastructure works.

As for its IoT and cloud division, the group offers smart farming, IoT, cloud services, software as a service (SaaS), applications and data centre services to enterprises and government.

“At REDtone, we help our customers [with] their digital transformation journey, mainly from the angle of leveraging data and technologies like cloud, IoT and artificial intelligence (AI) to make informed decisions, improve operational efficiencies and enhance customer experience,” Lau reiterates.

Profit at all-time high

REDtone is currently operating in a sweet spot, having posted a record profit of RM60.84 million in the financial year ended June 30, 2023 (FY2023). 

The company bagged The Edge Malaysia Centurion Club Corporate Awards 2023 for highest return on equity (ROE) over three years among member companies in the utilities, telecommunications and media sector. It achieved an average weighted ROE of 15.4% between FY2020 and FY2022.

The group’s financials have improved over the years, with net profit staging a strong rebound from RM6.61 million in FY2020 to RM26.28 million in FY2021 before improving to RM39.46 million in FY2022, then hitting an all-time high of RM60.84 million in FY2023.

As at June 30, 2023, the company’s net cash position stood at RM190.4 million.

Lau believes the top line and bottom line of REDtone will remain resilient in the next few years as he is cautiously optimistic about its business growth prospects.

“Our business has shown encouraging performance over the last five years, as reflected in our financial figures. We have been paying out dividends consistently over the past few years and further increased the dividend payment to 2.5 sen per share for FY2023 from 1.8 sen in the previous years. This has translated to an average of 4% dividend yield at the point of announcement.”

REDtone was founded by Datuk Wei Chuan Beng in 1996 and listed on Mesdaq — now known as the ACE Market of Bursa Malaysia — in 2004. Wei ceased to be a substantial shareholder of REDtone in May 2015, before stepping down as managing director in January 2017 to focus more on his angel investments.

The company was migrated to the Main Market on May 24 this year.

Year to date, shares of REDtone have gained 43% to close at 71.5 sen last Thursday, which translates to a market capitalisation of RM559.45 million. The counter is currently trading at a historical price-earnings ratio (PER) of 9.2 times.

Lau is of the view that compared to other telcos, REDtone’s PER is “way below” the industry benchmark and that there is still room for expansion of valuation when investors start to realise its value.

“We believe that as long as we continue to grow our bottom line and bring the company to the next level of growth, the market will eventually reflect the fair value of REDtone.

“At the current PER, I certainly think that our shares are being undervalued. I guess some investors still don’t view us as a big telecommunications company. But I think it is more important for us to demonstrate better sustainable growth,” he stresses.

Deriving synergies with U Mobile?

Since 2015, REDtone has been a subsidiary of Berjaya Corp Bhd (BCorp) — a local conglomerate controlled by Berjaya Group founder Tan Sri Vincent Tan Chee Yioun.

BCorp is the single largest shareholder of REDtone, with a majority stake of 47.46%, while the Sultan of Johor, Sultan Ibrahim Sultan Iskandar, is the second-largest shareholder with 17.34%. Lau has 2.3 million shares or a 0.298% stake in the company.

REDtone’s top 30 largest shareholders as at Sept 30 last year included Inter-Pacific Asset Management Sdn Bhd, three Eastspring Investments funds, two Manulife Investment funds, PRULink Strategic Fund and KAF Core Income Fund.

Interestingly, both Tan and Sultan Ibrahim are also major shareholders of unlisted mobile network operator U Mobile Sdn Bhd.

Lau observes that Berjaya is a huge conglomerate with hundreds of subsidiaries, spanning various business industries.

“There are opportunities for inter-company synergy within the group. We are providing services to some companies within the group in the area of our three core competencies,” he says.

Commenting specifically on U Mobile, Lau says “many possibilities in business can happen”.

In fact, he continues, being in an “almost same industry”, REDtone is already working together with U Mobile, mainly in the MTNS segment. Moreover, the group also provides telecoms engineering services to all the celcos (cellular companies) and U Mobile is one of them.

“Besides, REDtone is one of U Mobile’s enterprise customers too. All REDtone employees are on U Mobile corporate plans. We are open to any opportunities that will enhance shareholder value,” says Lau, who did not rule out the possibility of a merger and acquisition exercise in the future.

“It really depends on the opportunity. It must create synergies and win-win situations for our shareholders. From REDtone’s perspective, we are always looking for ways to maximise shareholder value. But I cannot disclose anything further than that.

“Business-wise, there is no clash or overlap. In fact, we could complement each other well. 

U Mobile is very strong in business-to-consumer (B2C), while REDtone’s strength lies in business-to-business (B2B).”

Given the fact that Sultan Ibrahim is next in line to be the Yang di-Pertuan Agong, certain quarters are wondering if REDtone could be a proxy or beneficiary of a “Johor-theme play”.

Lau says it is very much business as usual for REDtone as the group continues to focus on its three core businesses.

“We will strengthen and improve our operational efficiencies, while exploring new business opportunities. We are strong everywhere, not just in Johor.

“In fact, many people didn’t know that half of our resources have been allocated to Sabah and Sarawak. We are actually very strong in those two states, especially in the MTNS business.”

 

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