In my past articles about Nera Telecommunications (SGX: N01) (Nera), its payment solutions business has always been my focus due to the stable recurring revenues it generates. Recently, Nera announced that it’s going to sell its payment solutions business to Ingenico Group S.A. for S$88 million. To be honest, I was caught by surprise by this deal because my past interactions with the CEO and management give me the feeling that Nera would grow the payment business for a few more years before selling.
With that in mind, I decided to attend Nera’s EGM this year to find out more about the management rationale for selling Nera’s payment solutions business. So here are…
10 things I learned from Nera’s FY2016 EGM:
- Based on 1Q 2016 results, payment solutions only accounts for 15.6% of Nera’s total revenue. Ingenico’s offer price of S$88 million represents 35% of Nera’s market capitalisation (as of 19 May 2016). Payment solutions earnings is S$2.8 million (FY2015) which means that the offer price of S$88 million values the business at a P/E of 31. Nera as a whole trades around P/E of 18 — which means that that management is getting a good price for its payment solutions business.
- Nera views its payment solutions and network businesses as two distinct segments which require different resources and capabilities. Management views that the payment solutions business is an attractive one, but at the same time, managing both the payment solutions and network businesses requires a lot of resources. Hence, when buyers started approaching Nera about its payment solutions, the management started to question whether Nera should have a thin focus on two different businesses or pull its focus together and drive its network business further.
- The payment solutions business is based on a high volume of very low ticket items and requires a lot of resources to run. The network business, on the other hand, sells high ticket items where the price of hardware can easily be a quarter to half a million dollars. Hence, the skill set and the resources needed for each business is very different. This is the reason why Nera decided to let its payment solutions business go and channel all its capabilities and resources to high value-added services in the network business.
- The management believes that its network business will be able to sustain a strong position in the industry and Nera is steadily building up a lot of skill sets and competence in this business. Management views the growth for the network business will come from the growth in mobile, apps, and the Internet of Things (IoT), which means that operators will need to invest aggressively to keep their market share. If operators want to find more customers or increase their market share, they need to increase their data and network capabilities — and Nera will be the one to provide these services to clients. Nera will be well positioned in Southeast Asia, the Middle East, and Africa. In order to grow their Middle East and Africa segments further, the management needs more resources to grow, which is why Nera is selling its payment solution business.
- Payment solutions is a CAPEX-intensive business where Nera has to continually purchase payment terminals to lease out. This is a different business model compared to the network business which is a project sales model that has lower average CAPEX and inventories. Inventory levels can shoot up very high at times but this is project-driven and Nera does not stock inventory long term.
- Nera considers its working capital requirements before deciding on its dividend. Profitability needs to be there and the company needs to have enough retained earnings to pay out a dividend. There is no fixed dividend policy.
- Most of Nera’s debt is contributed from the payment solutions business. After the sale of the business, investors can expect debt levels to reduce and Nera will not have any long-term debt moving forward.
- To excel in the network business, Nera will focus less on hardware than software and service solutions. The company will transit to a network systems business model involved in domains like cyber security and data storage. This will give Nera better margins and less competition.
- Nera does not invest in the research and development of hardware. Its business model is to work with hardware technology partners and use their products to provide solutions for clients.
- Nera has stated that a substantial dividend will be paid out from the sale of the payment solutions business. So far, the management has been pretty tight-lipped about how much the actual dividend will be and no update on this was given at the EGM. The only information I learned is the money from the sale will be wire transferred into the company bank accounts by 31 August 2016 and shareholders can expect the dividend by the fourth quarter of this year.
