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NeraTel: Still a good investment for income?

Wednesday, February 25, 2015

NeraTel has been a rewarding investment for me. In their latest results presentation, I like their renewed focus on generating recurring income. It appeals to the income investor in me.




On top of their current strategy to grow recurring revenue from lease of POS terminals, they plan to build and lease in building mobile coverage network in Indonesia to strengthen recurring revenue. We should see their efforts bearing fruit in the following years.

In terms of performance, profit after tax fell rather dramatically by about 30%, year on year, but if we were to remove a one off contribution from negative goodwill which bumped up profit in the preceding year, then, the reduction is a more modest 1.2%. So, it would be quite fair to say that NeraTel's results were flat, year on year.

NeraTel has declared a final dividend of 2c per share. Full year DPS is, therefore, 4c. EPS for the full year was 4.48c. So, the payout ratio is about 90%.




At 76c a share, we are looking at a PE ratio of almost 17x. With a DPS of 4c which is undemanding, we have a dividend yield of 5.26%. About a year ago, NeraTel's stock was priced lower at about 71c to 73c a share. Given that profits after tax in FY13 and FY14 are similar (stripping out gains from negative goodwill in FY13), I don't think it is cheaper now to buy into NeraTel compared to 12 months ago.

NeraTel's balance sheet is relatively strong with very little long term borrowings. They do have a debt facility which they can draw upon to grow their business and they have indicated that they might be doing this soon with regards to their plan to build and lease in building mobile coverage network in Indonesia.




So, what am I going to do?

I will stay invested as I feel that a 4c DPS is sustainable. For me to add to my long position, however, Mr. Market would have to offer me a much lower price, all else remaining equal.


See:
1. Financial Statements FY2014.
2. Slides Presentation.


Related posts:
1. NeraTel: Added to my long position.
2. NeraTel: How high could its share price go?

16 comments:

amcpl1 said...

Hi AK,

Is rice/Book Value 4.835 for this Nera considered high in this case?

Bill

AK71 said...

Hi Bill,

I wouldn't use Price to NAV as a valuation tool for NeraTel. It is just like I wouldn't use it to value ST Engineering.

These are companies which derive much of their income from the provision of services. We are not investing in them for their assets. :)

FoodieFC said...

I have been watching the stock price of this share for the past 6 months. still waiting for it to drop to buy. Looks like the time will never come (even if it does assuming there's a crisis, I would probably be too scared to buy).

tsk tsk

AK71 said...

Hi FoodieFC,

Never say never. ;)

As investors, all we have to do is to get ready to take a bite if valuation should become more attractive. ;)

Elaine K said...

Hi AK

Neratel dived 4.2% this morning to 68cents! Tried searching for news but to no avail.

Any insight?Many thanks!!

Cheers
EK

AK71 said...

Hi Elaine,

Thanks for alerting me to this. :)

Well, someone must be selling down the stock but as to why someone is selling down the stock, I don't know.

I will say that, all else remaining equal, the stock looks like a better buy now. ;)

Rebel said...

Bought yesterday =o(

AK71 said...

Hi Rebel,

If you thought you paid a fair price for the stock, it only means it is cheaper now. Don't feel sad. :)

paul ng said...

Hi AK,

Nera gave 6 cents dividend for past two years. I notice the coming may dividend is 2 cents compared to 4 cents declared in may 2014. Could this be the reason for the drop? Any reason why the dividend is lower, because of the lower performance?

Today straits time articles mentioned about Asian pay TV trust, I guess this is not reit but a business trust? Any difference? Dividend yield seem high , 8.9% for 2014. But again the coming dividend is 0.02, half of what was declared last year during the same period. Do you consider this , fluctuation of interim dividend as signal of weak performance?

Thanks advance for your response.

AK71 said...

Hi Paul,

Actually, a DPS of 4c for Neratel has always been my expectation. You might want to read this:

Neratel: What is a sustainable dividend payout?

As for APTT, I believe that they used to distribute income half yearly. They have started distributing quarterly some time back. So, this is where you might experience a slight confusion. ;)

LOL said...

Hi AK,

I have seen in several of your blog posts that you mentioned about sustainability. May I ask how do you determine whether the DPU such as Neratel's is sustainable in the years to come?

AK71 said...

Hi LOL,

Trends don't change instantly, usually. So, looking at NeraTel's past (excluding extraordinary items) give us a sense of what is sustainable, earnings wise. Then, we can tell if the DPS is realistic or not.

Then, looking into the future, the recurring income portion of the business looks set to grow. Again, this is unlikely to change overnight.

So, is the DPS of 4c sustainable? It is a judgement call that is based very much on qualitative analysis.

AK71 said...

4c DPS is probably sustainable. At 64c, the dividend yield is 6.25%, much higher than at 76c (i.e. 5.26%). ;p

Technically, 62.5c is the support to watch. If that were to break, it could go to 61c and 59c (6.78% yield).

If we do not believe that NeraTel is able to grow at a faster clip, then, paying for it at a higher PE ratio does not make sense. If we are buying NeraTel for the dividends it pays, without a growh angle, we would want to buy at a lower PE ratio.

betta man said...

Neratel falling to 64c today doesn't sound rational as there aren't any bad news according to SGX website.

blazingruby60 said...

hi AK

Its finally out why Neratel price is dropping..
"Neratel,the telecoms, network and payment solutions specialist, reported a 33.8% drop in 1Q profit after tax to $3 million from $4.6 million a year ago."

AK71 said...

Hi blazingruby,

I was working on a related blog post this morning before leaving home for work. I shall put in the finishing touches later before publishing it. :)

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