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Nera Tel - Pulling a rabbit out of the bag?

I wanted to do a brief portfolio update on companies that have announced Q1 results in my SRS portfolio but ended up getting stuck at Nera Tel where it "deserves a post" by itself.

NeraTel Q1 results



This is the first set of results under the new owners and i "don't like it". The revenue and profit has declined, operating expenses has increased even though margins has improved. The "write back" of completed project costs also masked the improvement in margins. I will probably give it one more quarter to "prove" that this decline is temporary as Q2 and Q4 are traditionally slower months. 

Based on current results, the LTM EPS is around 5.18 cents and that translate into a LTM PER of around 13x. Not exactly "good valuation" already. I would say it is trading at fair value currently.
If i assume the full year profit drops by 10% from prior year, the EPS will drop to 4.82 and that will translate into a "forward PE" of 14x (even worse). The positive side of this counter is the high dividend payout it makes each year under the old management. We shall see if this trend will continue under the new management. Do note that the new management is a private equity firm and they will seek to exit the company in the next 3-5 years. The question is whether you believe they will do a good job or not.

Restructuring

Interestingly, at the same time as the Q1 results announcement, they also announced that Nera Malaysia has now become an wholly owned subsidiary after a restructuring where the company acquire 70% of the company it doesn't own. The consideration seemed to be too "cheap" to be true to me but in any case, it will be EPS accretive where on a pro-forma basis, the EPS will increase from 5.36 to 7.31 has the acquisition been completed last year (for illustration). While this is a very positive news, it is also quite confusing and raise questions as to why the 2 directors were previously holding the shares and why are they selling so "cheaply" to Nera Tel now?! 

Assuming EPS drop 10% for FY2013 using this revised figure, EPS will potentially hit 6.58 cents and the PER will drop to 10.2x which is now "attractive" again. Anyway, the above is just my "back-of the-envelope" computation. I will let the analysts come up with reports and see what they have to say.


Technically, we are in for a possible correction but it has had a good run up post my entry. There will be a 4c dividend to be paid in May which still translate into an attractive yield of 6% at current price and post Q1 acquisition, we will probably see a better Q2-Q4 onwards than prior year. 

Let's see how the share price reacts to the Q1 results tomorrow. A bad Q1 results was "offset" by a positive restructuring where the management took great length and pains to explain to shareholders why the acquisition is a good one. It is like a magician taking a rabbit out of the hat but never tell you why they managed to get the rabbit so cheaply and begets more questions than answers to me.

Happy Nera Telling...


2 comments:

  1. mr ipo really does a good analysis. would 60 cent be a better buy now?

    ReplyDelete
  2. Haha I don't know. Will have to see how Q2 pans out.

    ReplyDelete