Towards Financial Freedom

Neratel - Lower Growth Expectations

kiasutrader
Publish date: Thu, 27 Feb 2014, 11:00 AM
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  intake s  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 dividend payouts. Hence, we lower our growth expectation and cut our FY14 earnings forecast by 15%.


Source: OSK
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