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NeraTel: 6 points to note.

Tuesday, June 17, 2014

An investor since the middle of 2012, I shared my reasons for increasing my investment in NeraTel by 10x in June 2013 and it is currently one of my most substantial investments in a non-REIT. This is an investment primarily for income but it also has a nice growth story.

Victor Chng from The Fifth Person attended NeraTel's AGM last month and he made the following observations:

1. NeraTel is a high dividend paying company.

2. NeraTel's payment solutions business is growing.

3. NeraTel is increasing its CAPEX.

4. NeraTel's payment solutions are easy to scale.

5. NeraTel's POS terminals accept EZ-Link and NETS.

6. Capital restructuring is highly unlikely as of now.


For the details, please read Victor's article:
6 Quick Things I Learned From NeraTel's AGM 2014.

With already a substantial investment in NeraTel, I am in no hurry to add to my position. I will instead wait for some weakness in NeraTel's share price before deciding whether to buy more.

Related posts:
1. Which stocks have I been accumulating in June 2013?
2. Helping our parents invest their money.

18 comments:

sillyinvestor said...

Hi AK,

Sorry, cannot help it to do some advertisement here.

I did some scuttlebutt, beside Neratel, the big POS players here are Micros and NCR. NCR do ATM too. Bigger POS workstation like burgerking etc, use micros

Who build the terminals/workstation for Micros and to a certain extend NCR?

Venture (Vested)

hehehe, thank you for your airtime, nope, not going to pay you advertisement fees...

I believe the POS segment of venture will continue to do well too.

aceirus said...

hi AK,

Neratel got my attention when it was involved in some business contract to supply satellite solution to the winning bidder to develop Myanmar IT infrastructure. But at current price it is about 5x to NAV. Quite expensive if you ask me.

AK71 said...

Hi Mike,

Wah! Venture! Price so high! LOL. Normal to expect this kind of response from some? ;p

I have not looked at Venture Corp in detail but I have read reports that its earnings seem to be under pressure and there is concern on whether the dividends will have to be partially paid out from its cash holdings.

I don't understand the industry well enough to comment confidently but looking at PE ratio, Venture doesn't come across as cheap at $7.60 a share. Its profit margin is also very thin.

My impression is that Venture needs to see a strong cyclical recovery in order to do better as a whole whereas NeraTel seems set to grow its recurring income stream and there are positive catalysts in place this year.

So, if we are investing for income and looking for sustainability as well as a degree of certainty of growth, NeraTel might be a better investment.

Although Venture's POS segment will probably continue to do well, Venture needs to depend on a cyclical recovery for it to do better as a whole. I don't know but do you think that the needed recovery is on the horizon?

For sure, if the anticipated cyclical recovery takes place, Venture will do much better. If we are very sure this is going to happen, then, we should buy some.

To use a parallel, I added to my long positions in Hock Lian Seng and Yongnam because it is clear to me that they are natural beneficiaries of the building frenzy to improve transportation infrastructure in Singapore until 2030. It is like looking into a crystal ball and not a bowling ball for once. :)

So, if this is the kind of picture you see for Venture as well, then, I would be very interested too. More airtime for you. ;p

AK71 said...

Hi aceirus,

Then, you would never buy ST Engineering's stock. ;p

NAV is a good number to use if we are more interested in the company's assets. In NeraTel's case, we should be more interested in its earnings. So, PE ratio is a more useful measure.

Why its earnings? Because we will be able to tell if the yearly dividend it pays is sustainable or not. ;)

sillyinvestor said...

Wa AK,

You post my comment and so long never reply, I thought you unhappy I took you airtime and never pay you lei...

"My impression is that Venture needs to see a strong cyclical recovery in order to do better as a whole"

You are right, it is a recovery story. Just like when I bought Yangzijiang. I sold YZJ, and Venture is a cheaper alternative with higher yield that let me sleep better at night.

When we invest in cyclical, we need to get near the bottom. Just like YZJ, I got in only after signs of recovery are there (not confirmed for sure, otherwise how to get it cheap?), but being in a local company with net cash position, I actually so sleep better with Venture than YZJ, although they are of the same aplha cyclical recovery play.

I have blog extensively about Venture (3 blogs in total), I shall not bored people here. (Extra air-time)

I think we need to look at Venture at few different angles. Venture has the fattest margin compared to its competitors, plexus, benchmark and Jail it. These three are the closest com parables that do EMS and support the outsourcing of manufacturers.

In terms of ROE, ROA etc, Venture is comparable, but in terms of revenue growth, Venture did badly compared to them. I however, believed Venture is on the cusp of recovery for the next 2 years. (again is a projection)

Marco-wise, Venture customers are mostly US companies, and US economy is showing signs of recovery as long as republicans don't create drama.

Venture biggest drag is in the printing and imaging, if they successful prototype for Straya 3D in Shanghai, revenue will start flowing in from 2015, and we all know how 3D companies are growing.Venture should be able to pull that off.

Many point to the fact that Venture rev is going down and predict a straight line down from there. But qualitatively, it cannot be further away from the truth. Whereas its competitor Plexus has a Murky outlook due to one of its customer leaving, Venture has been gaining new customers for the past 2 years, the new customers are now contributing too.

There is a big disappointment in 2011-2013 when the recovery didn't materialised, and the doom and gloom get even louder. 2011-2012 are the years whereby orders are affected by M&A activities of its major customers, also lest we forget, 2012 is the Euro-crisis year, orders get dwindled, what is so surprising?

Many of its customers are bullish on their earnings outlook, but I think their customers are successful diversified such that is very difficult to guage the net effect. But earning is already at 13 years low, capabilities are intact, market share is intact, not going to be killed by competitors, what is the risk of investing? (Part1)


sillyinvestor said...

(start of part 2)
Historical PE over the last 13 years is 12-18, if we remove the outlying of above 20 during the boom years, and sub 10 during crisis year.

If we project growth over the next 2 years, and current sub 15 PE is going to be quite attractive, if they still drag their feet, 15 is not over-valued either. There is no growth priced into Venture price now.

Venture is also expanding its capacity, they are buying land in malaysia and Singapore to expand, they speak of management view of the future. Shouldn't they be cutting down costs and closing down factories if they think they are going to be in deep shit? Apparently, their Penang Factory will need to fulfilled orders from Oclaro who in their restructuring exercise shifted their manufacturing from Shanghai to Penang. Who say China is killing Venture?

Like YZJ, I know BDI is plummeting like nobody business, but no one know the bottom, I got in when BDI is around 1000, some distance away from the bottom of 800.

Venture in 2013 has shown 4 sequential quarters of growth and 2014 Q1 growth is the strongest for the past 3 years with all 5 segments including printing and imaging showing growth.

In fact, after some sideway movement, Venture price has been creeping up very slowly with the influx of positive upgrades from bokerages houses, the most well written one is from MayBank.

Also, Venture has shown a will to maintain dividends, even if I get the recovery timing wrong, I can collect very decent dividends, when their competitors are giving zero dividends.

Err.. sorry, when I start, I cannot stop...

I pass you a cheque later... hahahah

AK71 said...

Hi Mike,

Hahaha... You got worried? It took me a while to reply to your comment earlier mah because I wanted to pick your brains and I succeeded! Wahahaha! ;p

Hey, thanks for the very detailed comments. Appreciate it very much. Certainly gives me more insights into Venture Corp and I think I shall put it on my watch list. ;)

I think your crystal ball is clearer than my bowling ball. :)

sillyinvestor said...

Ah.. AK,

Put on your watch list, then as per your wisdom, take a look when there is blood on the street.

Choy Choy, don't "or sim" ok. The blood on street will be mine too!

Holiday season, more irritating than usual, pardon me!

AK71 said...

Hi Mike,

Actually, there are people who always wish for stock market to crash. Whenever I get the chance, I will tell them that it is very bad of them to wish for such things.

When I went for Value Investing Summit, one of the speakers was even asking the audience to wish for market crash with him. Greed could blacken the heart.

A market crash would cause immense hardship for many people and usually the working class would be the worst hit. It is a reflection of the economy in general, after all.

The sandwiched class like us would feel it too but if we had been prudent with our finances, we should come out of it OK.

Of course, market crashes will happen from time to time. Preparing for one is just being pragmatic but I will never wish for one. :)

Adarina Robin Foo said...

Hi AK71,

Just want to thank you for this post.

I am vested in this counter after reading your post aka your thoughts to yourself on Neratel.

Did some 'diligence' homework and took the plunge then.

Sitting on unrealised gains and receive dividends through CPFIS. Hopefully it will offset some of the cost of the HDB :)

Once again, keep up the good work in your blog :)

AK71 said...

Hi Adarina,

Wah! You could hear my thoughts to myself? Telepathy is a useful skill to have. I have to try to think about nothing when you are around. ;p

Thanks for sharing the good news about NeraTel generating income to help pay for your HDB flat. Gong xi gong xi! :D

aceirus said...

Hi AK,

Your crystal ball is working, I never consider buying ST engineering. :p

But thanks for the pointers. I will ponder on this and adjust my criteria for stock selection. :)

AK71 said...

Hi aceirus,

Yup. Good idea. :)

You might be interested in this blog post:
The Mystical Art of Wealth Accumulation.

I bought into ST Engineering for its attractive dividends. Its NAV per share was a small fraction of its share price. If I based my selection on NAV, I would never have bought the stock. :)

pf said...

I decided to invest for dividends with my SRS account. The business of reits is too difficult for me to understand. Too much info on reits and many performance indicators. So I decided to shop around and see what bloggers got. Next one I wanna buy would be hock lian seng. :)

AK71 said...

Hi pf,

Actually, REITs are relatively easy to understand. I find some businesses harder to analyse but there are simpler businesses, I agree. :)

Some of my SRS money is in endowment policies. The bulk of it is still waiting for war. ;)

pf said...

Now I'm just playing w my SRS money coz I've the major part of my portfolio in cash to prepare for my flat purchase. Slowly liquidating since beginning of this year. Think after I zero-rised my cash, I would have to build up my savings for investment from scratch. :(

Always here bloggers talk about the "war chest"....would the war happen anytime? Or is it progressive?

To me, I think that the market is always being manipulated. On and off there is the flight to safety syndrome. Penny stocks up, blue chip stocks/dividend play stocks down. Vision 20-20 on hindsight. Not sure if can beat the market. Need to beat emotions.

AK71 said...

Hi pf,

Well, we have different circumstances and we must do what is right for ourselves. :)

However, a war will affect all of us and give us the same opportunities. If we don't have a war chest or two ready, it would be quite depressing then.

You have probably read this but just in case:
Be prepared for war.

Prices cannot keep going up. The economy has booms and busts.

pf said...

Yeah...that sounds good. :)

I hope that the economy crash also. Things will be cheaper. When there is destruction then comes regeneration and progress.

Just that in the world right now, seems no political leader of major world economy has any political will to allow economic crash.

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