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NeraTel: Aggressive selling as 3Q disappoints.

Friday, November 6, 2015

Attention grabbing headline in the news for NeraTel:

"...earnings of $2 million for 3QFY2015, down 43.3% from earnings of $3.5 million in 3QFY2014."


This news led to some rather aggressive selling of the stock and I wondered if it was justifiable?

I made the observation before that NeraTel's revenue recognition can be lumpy because it is a project based business. It would be a mistake to place too much emphasis on any one quarter's results.

Could we see 4QFY2015 doing better which might give the full year results a boost? Of course, I don't know but looking at the first nine months' results, year on year, things don't look so bad.

The numbers are not pretty, for sure, but they don't look as bad as the headlines in the news which is about 3QFY15.




Quite obviously, revenue is down and expenses are up. 

A very competitive environment is old news, of course. In such an environment, remarkably, more or less, NeraTel has been able to maintain their gross profit margin. This is encouraging.

The question is whether am I going to stay invested?

I first invested in NeraTel at 40.5c a share and later added to my long position significantly in the middle of 2013 at prices from 60c to 63c a share. Given my rather large investment, the question of whether to stay invested or to partially divest is not one to be taken lightly.

As I invest primarily for income, I am mainly concerned whether NeraTel is still able to pay a meaningful dividend. I am also concerned if the balance sheet is still strong, naturally.



NeraTel is still a profitable business although it is not doing as well as before. 

To be honest, I would be pleasantly surprised if NeraTel is able to report a full year EPS of 4c which would mean having to report an EPS of 1.51c in 4Q2015, equivalent to 60% of earnings achieved in the first 9 months of 2015.

However, it would be equally surprising to me if NeraTel is unable to achieve at least a full year EPS of 3c which would suggest 4Q2015 coming in worse than 3Q2015.

Barring a bombshell of a 4Q, assuming that NeraTel should pay out most of its earnings as dividends, I believe a 3c dividend per share (DPS) is reasonable.

NeraTel's balance sheet is still strong. Operating cash flow has also remained positive.

I see challenging conditions for NeraTel but I do not see NeraTel going the way of the Dodo in the near future.

So, I will stay invested but, at this juncture, I won't add to my investment although I believe that NeraTel should be comfortable paying an annual dividend of 3c a share. 

I want to remember that given the stiff competition that NeraTel faces, earnings could continue to come under pressure.

If a DPS of 3c is a more realistic expectation based on a 100% payout of earnings, then, I would need a higher dividend yield for me to add to my investment.

Related posts:
1.
NeraTel: 1QFY15.
2. NeraTel: 2QFY15.

18 comments:

SMK said...

always preferred and liked this kind of posts from you.
well balanced, well thought out.
you excel on these topics.

Janson Tyle said...

If Neratel pays out 100% of its earnings and is around 3-4c, that would be around 5-7.5% yield.

Compared to other stocks like King Wan (which only pays out <75% of its earnings) or Tai Sin (<50% of its earnings) with similar percentage of yield too (also around 5-7.5%), wouldn't Tai Sin/King Wan be a much better choice?

What advantage does Neratel over other stocks like Tai Sin/King Wan which pays out much less of their earnings but yet able to achieve similar percentage of yield ?

AK71 said...

Hi SMK,

Thanks for the encouragement.

I try my best to see and say things as they are. :)

AK71 said...

Hi Janson,

We would have to look back in time for some answers.

Once upon a time, NeraTel's EPS was about 5c and DPS was 4c for a 80% payout ratio. Obviously, things have changed since then.

Investing in small and mid caps, investors often have to prepare themselves for more uncertainty and I dare say King Wan and Tai Sin have challenges of their own which might drive down earnings in future.

Topmost on my mind is the weak domestic real estate market and it is a situation that is likely to persist till 2017 or 2018. The health of the local construction industry has an impact on the both King Wan and Tai Sins' businesses.

I agree that based on numbers, King Wan and Tai Sin (both of which I have long positions in) look like better investments for income compared to NeraTel now. Hence, the last paragraph of this blog post. :)

ghchua said...

One must ask yourself why you bought the stock in the first place. For yield? For growth? For special situations etc?

Northstar Pacific Partners bought 50.1% of NeraTel @ S$0.49 in 20 Nov 12. It had been 3 years since then and they have collected a few rounds of dividends. Will they sell NeraTel and trigger another round of takeover offer? I believe this is a more important question to ask than looking at numbers like dividend yield, payout ratio etc.

I believe a few funds had bought NeraTel for special situation play rather than what you all have discussed above.

AK71 said...

Hi ghchua,

That is one possible angle to take on NeraTel.

I have collected a few rounds of dividends together with Northstar. It would be interesting to see what plans they have for NeraTel. Will they sell? I don't know but I remember one of their KPIs for the management was to increase earnings over a 3 year period and that doesn't seem like it is happening anytime soon.

Koala said...

Hi AK,

Can I ask where did you download neratel's quarterly reports? I noticed that their website is under construction and SGX does not upload their reports.

Thanks loads! :)

AK71 said...

Hi Koala,

I did a search online and found the slides. It is strange but I cannot seem to find the link now. I guess I should have done a few more screen captures. -.-"

betta man said...

Final Q4 dividend cut from 2 cents to 1 cent. Looks like the hey days of Neratel is over. What's your thought on this, AK ?

http://infopub.sgx.com/FileOpen/NTL_Ann_Q42015Results_Att.ashx?App=Announcement&FileID=390862

AK71 said...

Hi betta man,

There is no doubt that NeraTel is facing challenging times. Cutting back on DPS is prudent.

I do not think the company is going the way of the Dodo. I feel that NeraTel should still be able to hold its own in the business and I am staying invested.

SeeKay Go said...

Hi AK,

NeraTel price keeps going down. Do you think it's a good timing to accumulate more?

AK71 said...

Hi SeeKay,

I am still vested but I am not sure about adding unless things look up for NeraTel. They seem to be facing some difficult challenges.

AhJohn said...

Not good to sell recurring income business.

Nera Telecommunications says it is in an advanced stage of discussions for a possible sale of its payment solutions business.
http://www.theedgemarkets.com/en/node/275943

AK71 said...

Hi Ah John,

The POS business is the best reason for investing in NeraTel. I agree.

The time to let go of NeraTel could be near. -.-"

betta man said...

I let go at $0.69 this morning. At 52-weeks high. Made a small profit. Better be safe than sorry.

AK71 said...

Hi betta man,

I would be quite tempted to do a partial divestment if the stock price goes up a bit more too.

Congratulations! :)

betta man said...

The day has come. Surprisingly, Neratel share price went up after this announcement is made. What's your take on this, AK.

http://infopub.sgx.com/FileOpen/20160520_NTL_Ann%20Disposal_PS.ashx?App=Announcement&FileID=405814

AK71 said...

Hi betta man,

I said this to another reader:

Their POS business is what makes NeraTel an attractive investment for me. Selling it changes my investment thesis. It is probably a good idea to reduce my exposure to the stock. ;)

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