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If you’ve been a reader of The Fifth Person for some time, you might already be familiar with Nera Telecommunications and our past coverage of the tele- and info-communications company.
We first got interested in Nera primarily due to the potential growth in its recurring revenue streams when it first entered the payment solutions segment. As investors, we love to see stable, recurring revenues in a company – it gives us a form of predictability and the market generally tends to favor and place a premium on companies that have high recurring revenues.
Victor Chng attended Nera’s FY2013 and FY2014 AGMs while I attended the company’s most recent FY2015 AGM as we continually sought to gain more insights on Nera and how the management planned to grow its payment solutions segment.
So it came as a bit of a surprise when the board revealed, one day after the latest AGM, that they were in advanced discussions to sell Nera’s payment solutions business which was finally confirmed when the company announced the sale of its payment solutions business to Ingenico Group for S$88 million.
So now that the sale is confirmed, what can investors expect from the deal?
Nera’s project-based business model means that its revenues are generally uneven. Revenues increase when the company secures and completes more projects and vice versa. The payment solutions business was one segment that had the promise of building more stable, recurring revenues for the company. Now that it’s sold, that potential is gone.
Based on FY15 financials, the payment solutions business contributed 21% of total earnings. So even though the management is selling the business at 31 times earnings (which is decent), why would Nera want to sell a business that is doing well and has the potential to grow even more?
The board has explained that:
“The Proposed Disposal represents an attractive opportunity for the Company to unlock the value of its Payment Solutions Business, which is consistent with the intent of maximising returns to the shareholders. The Proposed Disposal will also allow the Company to sharpen its focus on the core network solutions business and strengthen the balance sheet of the Company.”
While that may be true, expect some shareholders to ask the board more questions about the sale of Nera’s payment solutions business.
The management has stated that they intend to “return a significant portion of the net proceeds from the sale to shareholders” – most probably through a special dividend.
Assuming that Nera distributes the entire disposal gain of $71.5 million, shareholders can expect a special dividend per share of 19.75 cents. Of course, we have no idea how much the board will decide to distribute until the EGM in Q3 2016, but assuming the numbers above, the special dividend will fetch a yield of 28% based on Nera’s last closing price of 70 cents (as at 20 May 2016). Knowing this, we can assume that Nera’s share price should rise leading up to the EGM when the special dividend is finally voted through and declared.