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NeraTel is an investment for income no more?

Friday, May 20, 2016

I have been a NeraTel shareholder for many years. In the middle of 2013, I significantly increased my investment in the company. At that time, I had this to say:

This is a net cash company and has a record of paying consistent and meaningful dividends. Its last payout was 4c a share with an EPS of 5c. At today's closing price of 61c, we are looking at a dividend yield of 6.56% which is very decent. With its recurring revenue streams, dividends are probably sustainable.

I started accumulating at 40.5c a share and the bulk of my investment are at 60c to 63c a share. Yielding about 5% annually, over the years, my investment in NeraTel paid me thousands of dollars in dividends. As an investment for income, it was pretty good.

Its share price went up and its share price went down. I did a few trades but I mostly held on tight to my investment for income. Movement in the share price didn't bother me.

Recently, I received many messages from readers, most of them asking me if they should sell their investment in NeraTel and some did as its share price rose from a low. I said I might consider partially divesting if its share price were to go higher, all else remaining equal.

Well, the share price did move higher and a good reason to reduce exposure to the stock surfaced:

Ingenico’s offer of S$88 million represents 35% of Nera’s market capitalization of S$251.5 million as at close of trading on 19 May 2016. Based on Nera’s FY2015 financials, its payment solutions business accounted for approximately 26% of the Company’s total revenue of S$181.5 million and approximately 21% of its total earnings of S$13.4 million. 

As an investor for income, I was most interested in NeraTel's payment solutions business for its more predictable income generating ability. The other two business segments with their more lumpy revenue are not as comforting.

While I understand that a large part of the gains from selling the payment solutions business would be distributed to shareholders, how much would it be on a per share basis? 

Although a back of the envelope calculation suggests that it could be as much as 17c or so a share, give or take a cent, it could be a case of killing the goose the lays the golden eggs.


With this in mind, I decided to reduce my exposure to NeraTel significantly, booking a nice capital gain in the process. 

With more than decent capital gains and dividends received over the years, the rest of my much reduced investment in NeraTel is probably free of cost. 

It would be interesting to see how the management unlock or create value for shareholders in future.


Added on 16 Jan 17:
Related post:
NeraTel: Aggressive selling as 3Q disappoints.
"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's balance sheet is still strong. Operating cash flow has also remained positive."


AK71 said...

Nera TelecommunicaƟ ons ($0.695, down 0.02) announced the proposed sale of its payment solutions business to Ingenico Group S.A. (“Ingenico”) for S$88 million.

Based on the book value of $16.5 million, the disposal gain is estimated at about $71.5 million. And based on the net profi t of $3.5 million, the exit PE is about 25x and price to sales is 1.9x. The sale valuation of the payment solution business compares well with Nera’s current valuation of 20x PE and 1.4x price to sales.

The net consideration is expected to be about $71.5 million and will be payable in cash on the closing, save for $10 million which will be held in escrow period of 9 months....

... a significant portion of the proceeds of $71.5 million will be returned to shareholders pending the closure of the deal and receipt of the proceeds. This translates to about 19.75 cents per share.

... its payment solutions business accounted for approximately 26% of the Company’s total revenue of S$181.5 million and approximately 21% of its total earnings of S$13.4 million. Ingenico’s offer of S$88 million represents 35% of Nera’s market capitalization of S$251.5
million as at close of trading on 19 May 2016.

Nera’s remaining wireless and infocomm business divisions will be valued at about 14x PE which is slightly below its historical average PE of 14.5x.

HOLD recommendation on Nera.

Source: Lim & Tan

SMK said...

nice one.

AK71 said...

> Hi AK,
> I read that you'd disposed most of your large holdings of the above stock.
> Though i knew you bought them at low low price years ago and you may
> want to lockin your gains now,
> I'm sure you're aware of Nera"s announcement on the sale of their POS
> payment .....and hence a special dividend.
> Why do you not hold for the special dividend?

After paying out the special dividend, the share price will logically decline by a similar quantum. So, I decided to sell at a reasonably higher price than my entry price instead of waiting for the special dividend.

AK71 said...

On a YOY comparison, gross profit for Q3 2016 declined 29.2% from $9.0 million to $6.4 million.Compared to nine months of 2015, gross profit for nine months of 2016 also declined by 7.2% from $32.0 million to $29.7 million.

The gross profit margin % (“GP%”) declined from 32.0% to 18.8% for the quarter, and from 33.5% to 25.7% for nine months of 2016.

On a YOY comparison, total operating expenses for Q3 2016 increased 17.0% from $7.2 million to $8.5 million. For nine months of 2016, total operating expenses increased 19.5% from $21.4 million to $25.5 million compared to the corresponding period.

Distribution and selling expenses increased 14.1% ($0.7 million) YOY for the quarter and 8.2% ($1.2 million) for nine months of 2016. The increase was mainly due to higher payroll related costs and provision made for doubtful debts.

Administrative expenses declined by 8.2% ($0.1 million) YOY for the quarter and 2.4% ($0.1 million) YOY for nine months of 2016 mainly due to lower payroll and related costs.

The Group registered a loss before tax of $1.7 million for Q3 2016 and a decline of 59.7% YOY for nine months of 2016.

There was a significant increase in net cashflows from investing activities due to the receipt of the net proceeds from the sale of the PS business. Part of the proceeds were used to repay bank loans.

An interim dividend of 15c a share will be paid on 30 November 2016.


AK71 said...

"Given the small profit base of the remaining telecommunication and infrastructure
businesses and the sharp run-up in share price of Nera in anticipation of the 15
cents special dividend payment, we are recommending investors to “Take Profit”
before the 15 cents special dividend goes-ex on 15 Nov’16." Lim & Tan Research

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