Target Price: SGD0.80
Not As Bad As It Seems
NERT’s 3Q13 results were below expectations, with SGD3.3m earnings (-42.1% y-o-y) booked on the back of SGD50.1m in revenue (+4.0% y-o-y) as costs soared. This was further dragged down by deferred recognition of some orders and revenue this quarter. Reiterate BUY, but with a lower SGD0.80 TP (11.4x blended FY13/14 P/E), as we had been overly optimistic on its short-term revenue growth.
• Opex rises with new office. Excluding expenses from its newly consolidated subsidiary, Nera Malaysia SB, and the newly built Nigerian office, Neratel (NERT)’s selling and distribution expenses would have only increased by 7.9% y-o-y instead of 14.5%, while its y-o-y administrative expenses would have dipped 4.9% instead of rising by 13.4%.
• Cost incurred before revenue. There was a delay in NERT’s revenue recognition, from work performed for a Singapore customer (which we suspect to be SingTel (ST SP, NEUTRAL, TP: SGD3.80), valued at an estimated SGD6m-7m. Even though the job was completed and all its opex was recognised, the revenue was not booked. Assuming that the hardware costs made up 70% of the contract value, NERT would have booked an extra SGD2.0m in PBT had the revenue been realised.
• Cost incurred before order wins. Orders slowed down in 3Q13, with order wins for its telecom segment falling to SGD10.7m (vs SGD13.3m a year ago). We believe that this was a temporary issue as festivals like Ramadan and Hajj caused some large orders to be pushed back. However, we believe its cost hikes would be justified in the long run by unlocking extensive opportunities in new markets such Nigeria, Libya and Myanmar.
• Revenue growth may not keep pace with order wins. Historically, NERT takes 6-9 months to complete its orders in hand. However, certain orders now take over a year to fulfill, due to customer requirements (rather than it not being able to speed up execution). As we were overly optimistic on the pace of its revenue growth, we now cut our earnings estimates for FY13 and FY14 by 18% and 17% respectively.
Publish date: 11/11/13