Neratel: Lower Growth Expectations
(NEUTRAL, SGD0.72, TP: SGD0.72)
NeraTel’s 4Q13 SGD3.8m PATMI (-0.6% y-o-y) and SGD44.5m revenue (-2.0% y-o-y) were below expectations. This was largely to disappointments in its telecom segment. Going forward, we lower our growth expectations as it will focus more on earnings quality and high dividend payouts. Downgrade to NEUTRAL with a lower SGD0.72 TP (from SDG0.80) based on 12.4x FY14F P/E (+1 SD to its 5-year average).
Middle East North Africa (MENA) telecom business the key disappointment. Although management previously expected its Nera branded point-to-point radio products to excel in the MENA region, actual results proved a disappointment. Revenue for this segment declined by 63.7% y-o-y in 4Q13 and 10.3% y-o-y for the full-year. NeraTel said this was due to intensifying competition as well as the group’s selectiveness in undertaking projects. Management provided the example of two projects valued at about SGD10m in aggregate that were not undertaken on their poor payment terms and weaker margins. On the other hand, new order wins for this segment also decreased 7.6% y-o-y to SGD67.6m. Going forward, we expect the expiry of the Nera product distributorship agreement in January will boost the group’s competitiveness. NeraTel can not only retain the Nera brand, but is also able to distribute other companies’ products. It will even be able to redesign/reengineer the Nera products to achieve cost competitiveness. Hence, we expect growth for this segment to pick up again this year.
Network and payment businesses continue to perform. In line with expectations, NeraTel’s network and payment segments’ sales grew strongly by 20.9% and 22.4% respectively during the quarter under review. Going forward, the jump in FY13 order intakes for both these segments will ensure sustainable growth.
More dividends, less growth. Since NeraTel has been taken over by a strong private equity fund, we reasonably expected the group to retain more earnings for growth. However, as it turns out, NeraTel will continue to focus on earnings quality and high dividends payout with an emphasis on risk management. Hence, we lower our growth expectation and cut our FY14 earnings forecast by 15%.
Publish date: 24/02/14