Nera Telecommunications - UOB Kay Hian 2016-05-23: The Golden Goose Of The SGX

NERATELECOMMUNICATIONS LTD N01.SI

Nera Telecommunications (NERT SP) - The Golden Goose Of The SGX

NeraTel has announced the sale of their POS payment business for a consideration of S$88.0m and estimates a gain of S$71.5m. The larger estimated gain will likely translate to an enormous S$0.16/share special dividend. This coupled with regular dividends, would enable its 2016 dividend to hit S$0.19 or offer a 27.1% yield.
The prospects of NeraTel’s remaining business seem bright, underpinned by a record orderbook.
We re-iterate BUY as investors should hold onto the stock as the S$0.04/share dividend will be sustainable going forward.

Nera Telecommunications (NeraTel) announced last Friday that Ingenico Group had agreed to purchase its point of sales (POS) payment business for a total cash consideration of S$88.0m, inclusive of S$10m held in escrow for nine months to satisfy any contingent liabilities.
The price came in at a whopping 453% premium to book value, 1.9x sales and 31.3x PE, resulting in an estimated one-off gain of S$71.5m.

The POS business was more lucrative than we had expected, both in terms of the deal price and profits raked in. The total consideration of S$88.0m was better than we had expected.
After deducting deal-related expenses, debts as well as the NTA value of the business, NeraTel can still book gains of around S$71.5m. This is 45% better than our original estimate of S$49.2m. This was because it contributed 21% or S$2.8m of the group’s 2015 profit, S$1.8m higher than our prior estimate.

Going forward, NeraTel’s management is confident that given time, its remaining network solutions business will grow to fill the earnings gap left by the POS business.
The disposal of the POS payment business will effectively enable management to focus their efforts on NeraTel’s core network solutions business, currently running with record-high orders.

We believe that the offer price is reasonable and overall beneficial to NeraTel’s shareholders with the enormous potential of the POS gain priced in.
Upon successful disposal, the company also expects to pay out a significant amount of the proceeds as dividends.
We are expecting a payout ratio of around 80%, which translates to an attractive special dividend of S$0.16/share. This coupled with the regular dividends of S$0.03, would enable 0.80 dividends to hit as much as S$0.19/share or 27.1% of 2016F yield.

We revise our 2017 and 2018 earnings forecasts downwards by 4.1% and 4.2% respectively as the remaining telecommunications/infocommunications business contributed lower-than-expected profit post the sale of the POS business (with POS payment business contributing higher-than- expected profit).
Nevertheless, demand for NeraTel’s remaining services remains robust as its orderbook reached a record-high due to strong growth in new order wins as well as a delay in revenue recognition from existing projects.
We understand that the current order backlog value exceeds 2015’s revenue as a whole. This implies that the current orderbook is worth more than S$180m, which should provide solid revenue visibility over the next year.
We estimate that from 2017 onwards, the group can at least deliver earnings of more than S$14.6m even without the POS payment business.

Maintain BUY with an unchanged SOTP target price of S$0.835.
The announcement of the disposal saw gross consideration for the POS business deal hitting S$88m with exceptional gains estimated at S$71.5m.
The POS business was more lucrative than we had expected, but our SOTP remains unchanged as the higher value of the POS deal offsets an overestimation of profits in the remaining businesses.

As the exceptional gains were larger than our expectation, the incoming special dividends should be higher than our earlier forecast of S$0.12/share and could hit around S$0.16/share. This should drive the share price closer to our target price as we believe this is something that the market has yet to price it.

Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2016-05-23

UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.835 Same 0.835