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NeraTel: Is 1QFY15 a sign of things to come?

Tuesday, May 5, 2015

I received a message from a reader last night saying that NeraTel's profit after tax plunged 33.8% for 1Q FY15. Looks bad, doesn't it?

I was somewhat surprised at the plunge since I remember that the full year 2014 results although not positive were flattish when compared to the year before. We don't usually see big negative shifts in a single quarter in a business as usual scenario. So, it is important to ask whether the decline is due to something that has permanently damaged NeraTel's ability to deliver the goods, so to speak.

NeraTel's management has for a while now mentioned that stiff competition is impacting the business. This is the reality but given their track record, NeraTel should be able to hold their ground even though they might have to give up some margin. This is just my view, of course.

In an interview that NeraTel's CEO, Samuel Ang, gave to The EDGE, some time ago, he said that it is important to remember that revenue recognition could be lumpy because NeraTel is generally a project based business. Annualising any one quarter's results would not give an accurate picture of full year performance. Now, with this understanding in mind, the weak 1Q FY15 results become less worrisome.

The following slides are self-explanatory:

2Q FY15 results, logically, should be better, all else remaining equal.

Although the stiff competition and pressure on margins are pertinent considerations, NeraTel's track record and their continuing efforts to expand their regional footprint, especially in the generation of recurring income, will likely bear fruits in future. How long will this take before we see significant results? I don't know.

However, even as we recognise the costs of expanding their business, as long as NeraTel's current businesses continue chugging along in the meantime, I would be quite happy to wait.

In conclusion, if we believe that 1Q's less attractive results were due in part to the lumpy nature of NeraTel's revenue recognition (i.e. it is an issue of timing), then, earnings over the next 9M should make up for the weaker 1Q FY15 showing.

In my blog post dated 25 Feb 15, I said that at 76c a share then, we were looking at a PER of about 17x and that it wasn't cheap as the stock was priced at 71c a share a year before that with similar numbers. Now, with a rather reasonable expectation that the numbers might remain similar this year, the current price of 65c a share looks more palatable.

See all presentation slides: here.

Related post:
NeraTel: Still a good investment for income?


KC said...

Statements like these give me the chills about Nera.

"Competition in the POS market remains high and fragmented with many local resellers selling different or even similar brands of point-of-sale terminals. In addition, there are also new market entrants offering alternative payment methods to try and disrupt the market."

L Lawliet said...

AK....Perhaps I don't really understand their business strategy well. Seems like a red ocean industry with cut throat competition. Neratel doesn't seem to have any form of innovation to counter their competitive threats. Their q1 orders ar almost flat. Hopefully telecom has higher margins. Based on your understanding of their u think they ar a gd long term investment for income?

AK71 said...

Hi Leonard,

I understand that it wasn't always like this. Competition has intensified in recent times but NeraTel has been around for a long time and this probably counts for something.

Is it a good long term investment for income? It has been one for many years, if we were to look at its past dividend payout record. Whether it will continue to be so is harder to say.

I am keeping an eye on their renewed focus on recurring income as well as their efforts to increase their income from overseas ventures. These are strategies which I agree with. :)

Unknown said...

Will you nibble more at 0.65?

RayNg said...

Just my thought...

1. CFO has resigned and I deem this is a bad new for Neratel.

2. Samuel Ang (CEO) has liquidated his entire 1M shares after Asia System (Northstar) took over Eltek. There may be a signal of top management change soon and may has negative impact of Neratel future?

3. Anyone has 'insider' info of how is the employees moral at Naratel?

not vested, yet.

AK71 said...

Hi LazyCat,

I already did. ;p

Just a nibble because I already have a significant position in NeraTel.

Unless valuations become compelling, I won't be buying much more. ;)

RayNg said...

Just my thought...

1. CFO has resigned and I deem this is a bad new for Neratel.

2. Samuel Ang (CEO) has liquidated his entire 1M shares after Asia System (Northstar) took over Eltek. There may be a signal of top management change soon and may has negative impact of Neratel future?

3. Anyone has 'insider' info of how is the employees moral at Naratel?

after post addition.

Samuel exchanged his Nera Tel shares for shares in Canopus Asia, the company used by Northstar to hold its stake in Nera Tel. The transaction was done to align Samuel's interests with those of Northstar.

AK71 said...

Hi RayNg,

With regards to point no. 2, in the comments section of another blog post, NeraTel: A day of fear.,I shared the following:

Selldown Unwarranted As Share Sale Misconstrued.

NeraTel’s CEO, Mr Samuel Ang recently sold off all shares under his name and the market reacted extremely negatively to the news.

On the contrary, our checks show Mr Ang effectively increase stakes as the parent PE fund Northstar allowed him to hold more stakes of the company in order to incentivise and retain the CEO.

Northstar, the current parent of NeraTel, is an Indonesian USD1.2bn private equity firm with a long solid track record, partnering with institutional giants such as GIC and TPG.

Recent deals include the Indonesian national bank TPN’s exit, where sources confirmed that Northstar stood to gain a 7x return.

Similarly, Northstar also set a target for NeraTel to achieve, doubling profits in three years’ time.

Source: OSK-DMG

We are reinstating a BUY on Nera Tel as we understand that the company’s CEO Samuel Ang (SA) who sold 1,040,000 shares on 17/18 July’13 at 82.5 cents a share (raising proceeds of $857,419)
will be re-investing a bigger amount to take up a minority stake in the parent company of Asia Systems (AS) who owns 53.38% of Nera Tel.

This is done so as to align SA’s interest together with AS and will enable him to effectively have a bigger effective stake in the company.

Source: Lim & Tan

qook said...

Initiated a small long position today, and would nibble more on dips. I like the long track record and I think the north star involvement is a positive. Thanks AK for your articles on Neratel, I read your articles all the way back to 2013.

AK71 said...

Hi qook,

Er... Remember to take everything you read in my blog with a pinch of salt hor. I forget to add salt from time to time... -.-"

qook said...

AK, of course I will add my own seasoning before investing :D but always helpful to read through something logical when guiding your decisions!

AK71 said...

Hi qook,

I like your recipe!

Yes, don't stop at salt. Add a variety of seasoning to suit your taste! ;p

KC said...

Can check glassdoor for employee feedback.

Unknown said...

Any comment on the new lady Chairman? She was hired for a purpose?

AK71 said...

Hi Thomas,

I have absolutely no idea. So, your guess is as good as mine. ;)

AK71 said...

Nera Telecommunications said its subsidiary has bagged a card payment contract worth approximately $10.6 million.

Under the contract, NeraTel will supply and deliver card payment terminals and software to an undisclosed financial institution in the Southeast Asia region, the company told the stock exchange in a statement.

The contract is not expected to have a “significant impact” on the communications firm’s financial year ending Dec 31, 2015.

NeraTel ended down 1 cent or 1.6% to 62 cents, giving it a market capitalisation of $224.38 million.


Nightmare_Angel said...

Massive sell down on the stock today! Has dropped by 7% since opening! :(

AK71 said...

It is probably due to the news:

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

Group revenue fell 20.2% to $39.6 million for the quarter to September, led by a decline in sales from both its telecom and its infocomm businesses.

Revenue from the telecom business fell 15.9% to $13.1 million, on the back of lower sales in the Middle East and Africa regions, while revenue from its infocomm business fell 22.2% to $26.5 million with the lower sales of network equipment and point of sale terminals.

NeraTel says both the telecom and infocomm industries are expected to remain competitive as mobile operators continue to demand for lower capex and opex costs, and the infocomm industry faces a fragmented market.

In the first nine months of 2015, NeraTel secured $164.7 million in orders, a 3.3% decline compared to the first nine months of 2014 of $170.5 million.


Betta man said...

Can we still reasonably expect a DPU of 4 cents per year from Neratel ?

AK71 said...

Hi betta man,

For a 4c DPS, we have to be reasonably optimistic.

A 3c DPS is prudent.

Mum4mygals said...

They are selling off their revenue generating payment solutions business for $88 mil.
At this time, although its nice to unlock value for shareholders, I am thinking, what comes next?
Issit it killing the goose for the golden egg in this challenging situation?

AK71 said...

Hi Mum4mygals,

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. ;)

AK71 said...

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.

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.

The proposed transaction is subject to approval by Nera shareholders at an Extraordinary General Meeting (“EGM”), which is scheduled to be held in Q3 2016. A formal announcement on the EGM and the distribution of the EGM circular to all shareholders will follow in due course.

Asia Systems Ltd (an entity controlled by the Northstar Group), which owns approximately 53.38% of Nera, has executed an irrevocable undertaking to vote in favour of the proposed transaction.

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