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NeraTel: A very good investment.

Saturday, July 13, 2013

There has been much said about how the recent surge in NeraTel's share price could be due to expectations that they could be the only Singapore company to benefit from the Telco licences awarded by the Myanmar government. Although it is not ironclad, NeraTel's expertise in the microwave radio transmission segment gives the company a high chance of winning the tenders.

What is more certain, however, is that, by early 2014, NeraTel will be able to move into its own engineering business and develop its own products and this change will improve the company's profit margins. In the meantime, the successful acquisition of Nera Malaysia recently will result in a one time profit of about $7 million.

Samuel Ang, NeraTel's president and CEO has this to say to investors:

"When you look at NeraTel as a company, you need to look at the whole year because we are in a market that involves a lot of capital expenditure. We cannot recognise revenue at one go, we need to look at the work progress, and there may be some delays with some customers"

Therefore, it is more important to note the order intake which represents the health of the business.

OSK-DMG believes that there could be an interim dividend this year and that the current dividend payout of 4c a year is also sustainable.

Reference:
Pages 12 and 13 in The EDGE, July 15, 2013 issue.
AK says: "An excellent write up in The EDGE and if you are interested in NeraTel, go get a copy."

Related post:
NeraTel: Is there no telling how high it could go?

16 comments:

Dividend Warrior said...

Hi AK,

Do you think ST Engg will launch another take-over bid again?

AK71 said...

Hi DW,

Unless Northstar Group which owns 53.4% of the company is willing to sell its stake, any potential take over bid is doomed to fail.

Since Northstar Group just bought over Eltek ASA's 50.5% stake in NeraTel last November, I cannot see why it would want to divest so soon unless an extremely irresistible offer comes along.

ST Engg offered 45c a piece in February 2012. How much is it going to have to offer this time to be successful?

Phileas.Wind said...

Is the CEO's comment of "some delays with some customers" meaning some payments process issue with major telco customers?

Should the investors take this as a potential risk to earning

AK71 said...

Hi Phileas,

We don't want to mix up earnings and cash flow.

If customers drag their payments, that affects cash flow and not earnings.

I believe the CEO is referring to the execution of projects because, sometimes, delays could be caused by customers which would affect recognition of earnings.

Kim said...

Hi AK
Do you know the fair value for nera? Thanks

AK71 said...

Hi Kim,

We have to think of NeraTel's potential growth and I believe it is going to grow rapidly in the coming years.

If I were to annualise the EPS of Q1 2013, I will get 6.48c. If I were to apply a historical PER of 10x, I will get a value of 65c or so.

However, now that NeraTel is expecting earnings boost and it has also found its way into the limelight, a much higher valuation could be in the works.

If NeraTel keeps growing its EPS steadily and if Mr. Market were to ascribe to it a PER similar to that of Keppel T&T, for example, the stock could be priced at more than $1 a share in another two to three years.

Musicwhiz said...

I read the article on NeraTel in The Edge. It was well written as it described the history of the Company, what it specialized in, gave some pertinent numbers, and also talked about the prospects and plans. Buying back the "Nera" brand name was a good move which helped the Company to enter five new markets, and their services to the telcos involved in Myanmar would also help to boost earnings.

But what I am not comfortable with is the current valuation. Would it be factoring too much optimism? If you take a yearly dividend of 4c/share (which is what they say they can comfortably pay), the yield is only about 5.2% historical. Would they be able to grow cash flows sufficiently to afford a higher dividend?

The Company did mention that they need high capex for expansion and also to extend their business. This could mean dividends are kept the same.

It would be interesting to see how things turn out for the Company. I will continue to watch.

AK71 said...

Hi MW,

I will be quite comfortable to receive 4c DPS for the next few years if the company needs to increase CAPEX. As long as the CAPEX will result in a higher ROE, I don't have any issues.

NeraTel's current share price is buoyed by optimism, I feel. I won't buy at the current price since I already have a substantial exposure to the stock. Instead, I would wait for a pull back to supports before adding. :)

Musicwhiz said...

Hi AK71,

Just a quick note - when you refer to capex resulting in a higher ROE, I think you probably mean the incremental capex resulting in a return higher than the cost of capital. In this case, ROE may not be the best measure; the Company has said it may gear up for acquisitions or business expansion, therefore changing the capital structure of the Company. Perhaps ROIC may be a better measure as it accounts for debt + equity.

The way to measure the effects of capex on ROIC - assess current ROIC and then ROIC after M&A - does the overall Group ROIC increase? This should be after factoring in potential finance costs arising from debt.

Thanks.

AK71 said...

Hi MW,

This is definitely something which you are more qualified to advise on. Thanks for the heads up!

Indeed, if the CAPEX is going to take place with the introduction of debt, ROE could become misleading.

Edison Chen reported that the management is considering gearing up a little but I hope it wouldn't have to.

Musicwhiz said...

Hi AK71,

I think a certain level of gearing is actually good for the Company if they know how to manage it well. Leverage is a tool used by corporations for growth and with the low cost of debt now, it probably may make sense to gear up slightly (not excessively).

How would we define excessive? When your finance costs are eating up whatever EBIT you can churn out, such that net profit becomes dismal or non-existent. I guess the Company should also be wary of borrowing to fund M&A which may not be accretive to earnings and which provide poor returns (the classic institutional imperative situation).

Another argument for market share gains may not always pan out as sometimes the upfront costs and expenses involve in penetrating new markets and taking market share may outweigh the benefits.

So it will be good to assess the prior track record of Management in M&A activity to see how they had fared. If there is no such historical track record, then I would give a healthy discount to such proposed plans until I can see some results.

Regards.

AK71 said...

Hi MW,

Thank you so much for weighing in on the matter of gearing. Good stuff to remember!

With NeraTel, since they are considering some level of gearing so that their POS business can grow more rapidly, it is probably a good thing. After all, their POS business is a high margin, tried and tested business. I would be surprised if it should have any surprises. ;)

However, I still hope it wouldn't have to gear up. A company that can do very well without any debt is probably still the best kind of company to invest in. :)

SAFE said...

Dear AK,

Any comment on Nera's 3Q result, it droped a lot. Thanks

AK71 said...

Hi SAFE,

Quite a sensational piece of news and Mr. Market has reacted in the usual way. I will probably share my thoughts later today. :)

blazingruby60 said...

hello AK
i read that Nera telecom is discussing sale of their payment unit . Negotiations is at an advanced stage although there is no binding agrement has been reached and no assurance of a deal. Should we as investors be concerned after all we hope to collect dividends along the way as a form of passive income and I bought in at a high share price of 0.79. If the sale goes through with their sale of their payment unit, what other business does Nera has to be able to generate profits? What is your opinion ?

AK71 said...

Hi Ruby,

As an investor for income, their POS business is most attractive to me. If the POS business is sold, it becomes a less attractive proposition.

I hope that they are able to get a premium price for their POS business if it is really sold. I believe the private equity group that bought over NeraTel a few years ago will do their best to make sure they get the best possible price.

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