Neratel - RHB Invest 2016-05-23: Big Potential Red Packet Incoming

NERATELECOMMUNICATIONS LTD N01.SI

Neratel - Big Potential Red Packet Incoming

Neratel is selling its payment solutions business to Paris-based Ingenico Group for SGD88m (31.3x FY15 P/E) and is expected to record a disposal gain of ~SGD71.5m. A significant portion of this is to be paid out to shareholders.
We expect total FY16F dividends to be a substantial 21 cents/share. This includes a special one-off 17 cents/share dividend from the sale, coupled with its usual 4 cents/share.
As a result, we lift our call to TRADING BUY (from Neutral) and raise our DCF-backed TP to SGD0.80 (from SGD0.55, 14% upside).

Neratel announced that it was selling its payment solutions business to Paris-based Ingenico Group for SGD88m. This business only regenerated SGD2.8m in NPAT for the company in FY15.
The SGD88m offer represents a 31.3x FY15 P/E valuation and accounts for 35% of Neratel’s market cap. The company is expected to record a disposal gain of about SGD71.5m, of which a significant portion is to be paid out to shareholders.
The exercise is still subject to approval by Neratel’s shareholders at an EGM scheduled to be held in 3Q16. However, majority shareholder Asia Systems Ltd, which is owned by the Northstar Group, has already executed an irrevocable undertaking to vote in favour of the proposed transaction.

A disposal gain of SGD71.5m from the proposed sale represents approximately 19.7 cents/share. Management said it intends to pay out a significant portion of this gain to its shareholders. We expect at least 17 cents/share to be paid to shareholders as dividends from this sale alone.
In addition to the usual 4 cents/share in dividends paid out annually in relation to its normal business, we expect total dividends for FY16 to be about 21 cents/share. This represents a massive yield of about 29.9% for this year.

We think this sale represents a great opportunity for Neratel shareholders to unlock value. It also allows the company to streamline its business activities. Neratel’s capex requirements and depreciation expenses would also likely decline after the sale of the business. This would be a positive for the company.
On the orderbook front, Neratel managed to continue delivering strong order wins and secured approximately SGD70.2m in 1Q16 in total. This was a 21.9% YoY increase and bumped up its orderbook to a record high, estimated to be > SGD180m.
As a result, we lift our recommendation to a TRADING BUY and raise our DCF-backed TP to SGD0.80 (from SGD0.55), which implies 12.6x ex-cash FY17F P/E.
Key risks include the payment solutions business sale falling through and an economic recession.

Jarick Seet RHB Invest | http://www.rhbinvest.com.sg/ 2016-05-23

RHB Invest SGX Stock Analyst Report TRADING BUY Upgrade NEUTRAL 0.80 Up 0.55