Monday, January 09, 2006

Redtone's Tumble & Who's Next

As reported in The Edge Daily:

"REDtone International Bhd, whose share price fell to its historic low of 94 sen on Jan 6, has warned of lower earnings in the next two quarters as competition in the industry continues to intensify. Group chief executive officer Wei Chuan Beng said that its local business was operating under intense competition in the telecommunications market as major telecommunications companies were slashing their call rates. Wei also said the commercial rollout of its discounted call business in China this month would contribute to its earnings from March onwards. In Pakistan, since its commercial rollout last January, the operations have been showing monthly revenue of RM3 million. For the second quarter ended Aug 31, 2005, REDtone posted a lower-than-expected net profit of RM6.01 million. Analysts’ consensus estimates for the financial year ending Feb 28, 2006 is RM27.08 million net profit. "

To me, Redtone is easily one of the better run Mesdaq companies. In general, the level of senior management's knowledge, persistence and strategising ability are way above average. The tumble in their share price has more to do with the business itself, which itself is becoming commoditised. When it gets easier and easier to put up a box and start terminating/sending calls, when it is difficult to clamp down on illegal operators, when there are many "questionable operators" acting as intermediaries to terminate international calls at dubious below market rates - it makes for a very difficult environment to be operating in. Still, Redtone should survive albeit at lower margins.

The tumble in share price could have been lesser in quantum if the company added new revenue streams from other platforms (not VOIP related). VOIP was a good platform for Redtone to build a successful small company. Rather than fall in love with the industry, one must strategise a company's business mix much like predicting cycles and turns in real economy.

What is amazing is that there are similar type companies being helmed by people that are less capable on almost all levels when compared to Redtone, and amazingly their share prices are still standing firm - probably because institutional investors and big players have shown zero interest in them in the first place, so no shares to sell. If they had even a better spread of shareholders, these two companies (VOIP based) would and should drop by an even bigger quantum than Redtone. This is not a piece of investment advice - just an opinion - if short selling is legal, I'd be shorting Modular Tech and Nasioncom.

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