15 things I learned from NeraTel’s 2016 AGM

Nera Telecommunications Limited (SGX: N01) (NeraTel) offers a range of products and services in the areas of wireless infrastructure networks, satellite communications, network infrastructure and payment solutions.

NeraTel’s growing payment solutions business and its potential recurring revenue growth was what piqued our interest in the first place. We attended NeraTel’s FY2013 AGM and FY2014 AGM previously to find out more about the company and this year was no different – we went for the AGM again to gain new insights on NeraTel.

So here are…

15 things I learned from NeraTel’s FY2015 AGM:

  • Before the AGM proper got underway, CEO Samuel Ang updated shareholders on NeraTel’s current competitive landscape and strategic direction. The 25-minute presentation was detailed and highly technical with Ang often getting lost in the technical intricacies of his business. An investor new to the company might find it confusing to understand all of what was being said but it highlighted the fact that the CEO is someone who is very hands-on and knows his business and the industry it operates in like the back of his hand.
  • NeraTel is moving away from being an equipment provider to a multi-domain IT solutions provider. CEO Samuel Ang believes hardware itself is a commodity and NeraTel’s value proposition lies in its software solutions that operate the hardware and systems for its clients. He gave the example of the PC market where there is very little differentiation among PC parts – one motherboard or RAM chip is pretty the same as the other. While PC enthusiasts can pick and choose which physical components they want in their computer, they all mostly end up with one kind of operating software — Windows. NeraTel employs the same strategy: Instead of trying to build the equipment, they simply use the best equipment already out there in the industry and design software solutions for the hardware to fit their clients’ IT needs. At the end of the day, regardless of which equipment provider the company uses, it is NeraTel’s software that ultimately runs the system and the NeraTel brand that the client identifies with.
  • The CEO emphasized NeraTel’s capabilities not just in one area but in multiple IT domains. He gave the example of the Singapore University of Technology and Design where they needed IT solutions for the entire campus from network routing, switching, security, Wi-Fi, etc. He mentioned that very few companies in Singapore can provide an entire end-to-end solution for a project like this. One company might be an expert in networks or Wi-Fi but not in other areas. NeraTel has the capability to provide expertise in multiple unique domains and this allows them to differentiate itself from the competition.
  • The CEO admitted that competition is intense is the industry. NeraTel’s gross margins have been consistently hovering around 30-33% the past few years but there is increasing pressure. To mitigate that, management aims to drive higher revenue growth to protect its margins as much as possible. This brings us back to NeraTel’s strategy: Equipment distributors face thinner margins of around 10% as what they offer is commoditized but IT solution providers like NeraTel who deliver a unique proposition for clients are able to charge a premium and enjoy better margins of 30%.
  • This strategy also extends to its payment solutions segment. NeraTel buys the hardware (i.e. payment terminals) and then designs the software infrastructure to cover the client’s payment solution needs. NeraTel’s system manages the front- and back-end, security and encryption, loyalty programmes, etc. as many banks and financial institutions now prefer to outsource the whole operation from installation to servicing. It is this end-to-end capability where NeraTel is able to add value to its clients.
  • NeraTel’s payment solutions business is growing. Recurring revenue, part of which comes from the payment solutions segment, grew 9.2% for FY2015 and contributes 39% of NeraTel’s total revenue. This segment is growing strong in Indonesia where NeraTel has partnered a local bank who wants to aggressively build its recurring revenue streams and NeraTel sees huge potential in the market. According to NeraTel’s Financial Controller Mark Weng Kwai, Singapore’s payment solutions market is rather saturated but penetration is still relatively low in the region. NeraTel’s payment solutions is also in Malaysia, the Philippines, Thailand, and Myanmar. There is strong growth in Thailand as the government is pushing for e-payment and the economy to go cashless. In Myanmar, 90% of the payment terminals currently in the country are from NeraTel.
  • NeraTel’s payment solutions presence in six countries allows it to enjoy economies of scales. According to the CEO, the company can command better prices from suppliers as they can bulk order hundreds of thousands of payment terminals compared to a smaller player who might only order ten thousand or less.
  • A day after the AGM, NeraTel disclosed details of a possible disposal of its payment solutions business.

    The Company is currently at an advanced stage of discussions with a third party regarding the possible disposal of the payment solutions business of the Company. The Company also wishes to advise that while discussions are continuing, no binding agreement has been reached and there is no assurance that the transaction will actually proceed. If a definitive transaction takes place, it would be subject to, amongst other things, shareholders’ approval.

    While nothing is yet confirmed, we’ll have to wait and see if NeraTel does indeed dispose its payment solutions segment (which would alter our original investment thesis).

  • The CEO revealed that HR and its costs are a challenge. NeraTel’s scope of work can be complex and technical and requires people with specialized skillsets which are not always easy to find. The company has to invest in its human capital to retain talent among its workforce and that drives costs up.
  • CEO Samuel Ang mentioned that the shift to digital and big data is growing and here to stay. More and more people are migrating to the cloud and consuming larger amounts of data online. With this trend, the need for digital infrastructure and the companies who build and manage it (like NeraTel) will benefit.
  • NeraTel takes IT security very seriously as more and more companies migrate to the cloud. According to the CEO, security must cover three dimensions: pre-attack (having secure systems, IDs passwords, etc.), during an attack (identifying an attack and how to handle it), and post-attack (implementing control measures to prevent the same lapse from happening again).
  • Wireless technology will be future. CEO Samuel Ang said that it’s expensive to lay fibre cables in places where its impractical (mountainous regions and places prone to theft and damage). Base stations that send data and communications wirelessly is the solution.
  • A shareholder asked about the probable inclusion of a fourth telco in Singapore and how that might affect NeraTel. The CEO replied that a fourth telco will benefit the company as the new telco would need to build its own info-communications infrastructure. He shared how Virgin tried to enter the Singapore market as a virtual operator without its own infrastructure and only relied on its brand name to win market share. It duly flopped.
  • Another shareholder noticed that NeraTel’s debt rose in FY2015 and asked the reason for its increase. Financial Controller Mark Weng Kwai replied that NeraTel has capex on long-term projects and the board will, time to time, seek financing for the fixed assets. The financing helps to ease the company’s working capital and allows NeraTel to maintain its dividend payout to shareholders. Looking at their track record, the company has kept up that end of the bargain and paid on average at least 3-4 cents dividend per share every year since 2007.
  • Finally, activist investor Mano Sabnani asked the board if they would consider implementing a fixed dividend policy since dividends have been relatively consistent for years. The board replied that they would rather not as shareholders will raise questions whenever the company fails to meet dividends for a particular year. Instead, the board will decide on the dividend payout based on cash flow, capex, and the working capital needed. They reassured shareholders that the board in general does not want to hoard too much cash and prefers distributing the cash out via dividends.

Read more: 3 things investors should know about Nera’s sale of its payment solutions business

Adam Wong is the editor-in-chief of The Fifth Person and author of the national bestseller Lucky Bastard! which made the Sunday Times Top 10 Bestseller's List in 2009 and Value Investing Made Easy which made the Kinokuniya Business Bestseller's List in 2013. In 2010, he appeared on U.S. national television on the morning show The Balancing Act. An avid investor himself, Adam shares his personal thoughts and opinions as he journals his investing journey online.

6 Comments

  1. anon

    May 18, 2016 at 11:29 am

    If Payment Solutions is a growing recurring revenue stream, I don’t understand why NeraTel would look into selling this segment of their business. Any idea?

    • Adam Wong

      May 18, 2016 at 2:17 pm

      Hi Anon,

      Your guess is as good as mine but in any case there are potentially two outcomes to this:

      1) NeraTel doesn’t sell its payment solutions business and things carry on as per ‘normal’

      2) NeraTel sells its payment solutions business and unlocks a certain amount of value for investors. The cash could then be redistributed to shareholders as dividends, etc.

      • anon

        May 18, 2016 at 5:20 pm

        Hi Adam,
        I have been following Fifth Person’s narrative on NeraTel, which was positive on NeraTel only because of its payment solutions business deemed recurring. Should NeraTel sell its payment solutions business, would this mean that their revenue reverts to “lumpy” and thus less favourable to Fifth Person? Thanks.

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