NeraTel – UOBKH

Nera Telecommunications        NOT RATED
Price: S$0.73        Mkt Cap: US$213m        Daily Vol:  US$0.5m        1-Yr Hi/Lo: S$0.83/S$0.49

Network Specialist With Attached Payment Business

• Nera Telecommunications (NeraTel) was incorporated in 1978 and was listed on SGX in 1999. It operates predominantly in the Asia Pacific region (Singapore: 40.3% of 2012 revenue, Indonesia: 11.9%, Thailand: 7.9%, Malaysia: 5.7% and Philippines: 5.1%).
  
• NeraTel has three core businesses, namely Wireless Infrastructure Network (WIN), Network Infrastructure (NI) and Payment Solutions (PS):
  

  a) WIN: NeraTel specialises in microwave transmission for mobile networks. It supports mobile operators in their 3G/LTE network expansion and roll-outs. It uses a common product platform, its Evo series of microwave radio built around a software defined core.
  

  b) NI: NeraTel provides high-performance IP network infrastructure, such as wide area network linking corporate HQ with offices/branches, retail outlets and data centres. It collaborates with Juniper Networks to deliver products to customers in Southeast Asia.
  

  WIN and NI are complementary network businesses. NeraTel undertakes turnkey network projects covering complete life cycle, including planning, designing, installation, commissioning, testing and post-sales service & support. NeraTel is vendor agnostic and customises the best solution for its customers.
  

  c) PS: NeraTel provides end-to-end electronic payment solutions, including point-of-sale payment terminals, to the banking and retail industries. Management expects growth to be driven by Indonesia and Thailand. PS is a stable business with 50% of revenue coming from recurring sources such as maintenance and rental.
  

Three Core Businesses – WIN, NI And PS

	1H13 Revenue (S$m)	% of Total (%)	Gross Margin* (%)	% from Recurrent Revenue (%)
Wireless Infrastructure Network (WIN)	32.5	38.9	24.9	20-30
Network Infrastructure (NI)	32.8	39.2	35.3	35
Payment Solutions (PS)	18.3	21.9	35.3	50
Total	83.6	100.0

*Based on financial performance in 2012. NI and PS was classified as Infocomm business in 2012. 
Source: NeraTel

 

• A new controlling shareholder. Northstar through its subsidiary Asia Systems acquired 181.1m NeraTel shares representing a controlling 50.1% stake from Nera ASA at S$88.8m or S$0.49/share in Nov 12. Northstar only managed to secure another 12m NeraTel shares in the subsequent general offer at the same price of S$0.49. In total, Northstar garnered a 53.4% stake in NeraTel at the close of the general offer in Jan 13.
  

• Direct sourcing generated margin expansion. NeraTel acquired the Nera trademark and secured non-exclusive rights to provide microwave radio solutions in Middle East & North Africa in 2011. It has streamlined itself by using an ASEAN-based contract manufacturer to produce its own range of microwave transmission equipment instead of purchasing them from Nera ASA. The reorganisation helped improved gross margin from 23.7% in 2010 to 28.6% in 2011.
  
• Growth drivers/catalysts: NeraTel’s order in-take has increased 21.2% yoy to S$121m in 1H13. Management expects growth to be driven by the WIN business:
  

  a) Radio Access Network (RAN) Optimisation. NeraTel has secured a couple of orders for distributed antenna systems, which enhances in-building coverage for mobile operators.
  

  b) 3G Data Offloading Using WiFi. Many mobile operators will be using small cells to extend coverage areas, increase network capacity and offload data traffic through the internet.
  

Order In-Take For 1H13

	Order In-Take	yoy % Chg
Wireless Infrastructure Network	S$44.0m	+13.1%
Network Infrastructure	S$55.3m	+28.9%
Payment Solutions	S$21.7m	+20.6%
Total	S$121.0m	+21.2%

Source: NeraTel

 

• Unlocking value of PS business. NeraTel will be positioned as a network company. The accompanying PS business could be carved out as a separate entity. It could be listed/spin-off through an IPO. Management intends to provide more detailed financial information to help investors understand the value of its different businesses, including separate profit & loss, balance sheet and cash flow statements for the PS business.
  

• Capital management and dividend policy. NeraTel has a solid balance sheet with net cash/share at S$0.07 as of Jun 13. It could gear up to improve its ROE, which was 30.5% in 2012. Management is in the midst of reviewing its capital structure and intends to have gearing at a conservative level. The optimal capital structure will be decided based on stability of cash flows, requirements for capex and opportunities for M&A.
  
• NeraTel has already paid interim dividend of 2 cents/share. We expect management to maintain final dividend at 4 cents/share, bringing dividend for the full year to 6 cents/share. The stock currently provide lucrative dividend yield of 8.2% based on current share price of S$0.73.
  
• Invest to acquire new capabilities. Management intends to pursue mergers & acquisitions in the areas of RAN optimisation and 3G data offloading, particularly companies that could provide local fulfilment in regional countries.
  
• Management targets to double earnings over the next 4-5 years. NeraTel is able to tap on Northstar’s expertise, especially their knowledge and connections in Indonesia.
  
• Attractive valuation. NeraTel trades at forward PE of 10.6x based on consensus estimate. Its peers in the WIN space include Ceragon Networks (loss making), Ntegrator International (loss making) and Keppel Telecommunications & Transportation (forward PE at 14.1x).