Nera Telecommunications - UOB Kay Hian 2016-08-04: 2Q16 Lacklustre Headline Results Could Provide Buying Opportunity

Nera Telecommunications - UOB Kay Hian 2016-08-04: 2Q16 Lacklustre Headline Results Could Provide Buying Opportunity NERATELECOMMUNICATIONS LTD N01.SI 

Nera Telecommunications (NERT SP) - 2Q16: Lacklustre Headline Results Could Provide Buying Opportunity

  • NeraTel posted lacklustre headlines in 2Q16 but we attribute the drop in net profit to one-off forex expenses and a stock obsolescence write-down. Excluding these factors, net profit would have come in at S$4.5m, +15.4% yoy. 
  • We believe the POS disposal should be completed in 3Q16 and special dividends will be announced then. 
  • Order wins from the ex-POS business remain strong, supporting our confidence in NeraTel’s future. 
  • Maintain BUY. Target price: S$0.835.



RESULTS


Revenue up but net profit down. 

  • Nera Telecommunications (NeraTel) announced a poorer-than-expected net profit despite posting strong revenue growth. 
  • Net profit declined 51% yoy to S$1.9m on the back of a 17.6% yoy increase in revenue to S$56.9m, largely impacted by one-off expenses.

Impacted by one-off forex loss and write-down of stock obsolescence. 

  • The weak results are attributable to S$1.8m in forex losses, largely due to the weakening of Nigerian Naira as well as a S$0.7m write-down in stock obsolescence. Excluding these one-off items, net profit would have been S$4.5m, reflecting an increase of 15.4% yoy.


STOCK IMPACT


POS disposal gain and special dividends to come in 3Q16. 

  • We expect the point-of-sale (POS) business disposal to be completed in 3Q16 and the company to pay out a hefty special dividend in the quarter. As such, our expectation for 2016’s full-year FY16 NAV/Share (S$) dividend remains at S$0.19/share, translating to an attractive 27.1% 2016 yield.

Orders wins from ex-POS business remain strong. 

  • In 1H16, NeraTel’s telecommunications business secured around S$44.6m in new orders (+1.3% yoy), driven by more in-building contract wins. Its network infrastructure business secured S$61.0m in new orders, an impressive increase of 29.3% yoy, as service provider customers increased their orders. 
  • While new orders for the POS business was worth only $20.3m (- 40.9% yoy), this was due to delays in order in-take from a customer but we believe that with the disposal of the business, there is no need for concern.

We remain confident that the remaining business can fill the gap. 

  • Going forward, we share management’s view that the remaining business will grow to fill the gap left by the disposal of the POS business. The disposal will effectively enable the management team to focus their efforts on its core network solutions business, which is currently running with record-high orders.


EARNINGS REVISION/RISK


Forecasts unchanged as fundamentals remain intact. 

  • We keep our future forecasts unchanged as the impact of the weak 2Q16 results on our full-year forecast is one-off while its orderbook value for the remaining telecom and network infrastructure business remains at a record high, supporting our confidence in its future.


VALUATION/RECOMMENDATION


Maintain BUY and SOTP-based target price of S$0.835. 

  • We believe the poor 2Q16 headline results should create some price weakness for the stock. If the share price falls by a sufficient extent, this could serve as an excellent opportunity for investors to buy into weakness. 
  • Our SOTP-based target price of S$0.835 remains unchanged as the underlying fundamentals remain intact.


SHARE PRICE CATALYST


Announcement of the special dividends. 

  • An announcement of special dividends (from the POS sale) should drive the share price closer to our target price as we believe this is something that the market has yet to price in.




Edison Chen UOB Kay Hian | http://research.uobkayhian.com/ 2016-08-04
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 0.835 Same 0.835


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