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

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?

1. Nera’s revenue will revert to being ‘lumpy’

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.

2. Anticipate questions at the EGM

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.

3. Expect Nera’s share price to rise

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.

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.

3 Comments

  1. YH

    May 23, 2016 at 5:47 pm

    Hi Adam

    Could it be that the special dividend has already priced in the current market price?

    • Adam Wong

      May 23, 2016 at 10:49 pm

      Unlikely. Assuming the board pays out just half of the disposal gain, that’s still almost 10 cents in dividends. Based on Nera’s latest closing price of 69.5 cents, that’s a 14% yield waiting on the table.

  2. Pingback: 15 things I learned from NeraTel’s FY2015 AGM | The Fifth Person

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