Nera Telecommunications’ (SGX: N01) share price has fallen 47% from 77.5 cents to 41 cents (as at 19 December 2016). The reason for this fall is due to the company’s disposal of its payment solutions business unit to Ingenico Group for $88.4 million.
If you recall, the initial reason why I invested in NeraTel three years ago was the growth of its payment solutions business. Due to its business model, the payment solutions business generates stable, recurring revenues – and a company with stable, recurring revenues usually trades at higher valuations.
So when NeraTel announced the sale of its payment solutions business in May 2016, I was disappointed (even though NeraTel mentioned they would pay a special dividend to shareholders as a result of the sale). Firstly, I felt the business still had huge growth potential and NeraTel was selling out too early. Secondly, the sale meant that NeraTel’s source of recurring revenue would disappear which would hurt the company’s valuation. Finally, it also meant that my initial investment thesis was no longer valid and it was time for me to exit.
Personally, I planned to divest my stake when the company revealed the actual dividend it would pay to shareholders. (Back in May, NeraTel stated it would pay a special dividend but didn’t reveal any other details of the payout.)
On Oct 26, NeraTel unexpectedly announced that its CEO Samuel Ang would be resigning and leaving the company. To me (and, I’m sure, to many others), that came as a surprise because the CEO was heavily involved in the strategic growth of the company.
On Nov 8 after market close, NeraTel finally declared a special dividend of 15 cents. However, its announcement also contained some more bad news – its core operations (Wireless Infrastructure Networks and Network Infrastructure) posted a third-quarter loss of $1.32 million. The group also recorded a 66.2% decline in profits for the three quarters ending September 2016. In other words, without its payment solutions business, NeraTel’s core operations didn’t seem to be doing too well at all!
However, that was one more unexpected twist — the U.S. was holding its presidential elections that same day and results of Donald Trump’s shock election (on Nov 9 morning in Singapore) triggered more volatility in the markets.
I honestly expected NeraTel’s share price to jump slightly after the announcement of its special dividend and analysts were also calling a target price of 83.5 cents. Instead, it traded down to 69 cents and then 63 cents, before settling around 46 cents after crossing its ex-dividend date. Thus, I didn’t get the opportunity to divest NeraTel when I expected to. Based on hindsight, I could have still sold at 69 cents (or even at 63 cents) but I didn’t.
At this point, though, I’m still sitting on a total return of around 14% including the special dividend of 15 cents per share and the rest of the dividends I’ve collected over the years. Looking forward, NeraTel is likely to continue to pay a stable annual dividend (albeit a lower one) which I’ll cover why in the points below.
In any case, there are two takeaways I learned from this:
First, I assumed that prices would rise higher after the special dividend was declared. This is because of my past experiences with stocks that rose higher when a large dividend was announced. But like we say, past performance is not an indicator of future outcome and this was the case here.
Second, always remember when it comes to investing, you’re always dealing with probabilities. Out of 10 stocks, 7-8 might turn out the way you plan while the rest don’t – even with the utmost due diligence on your part. Therefore, you should never bet the house on one single stock – no matter how bullish you are about it. In this case, NeraTel comprises 8% of my portfolio (and I’m still netting a positive overall return), so I don’t have any problems here. But this is an important reminder nonetheless.
So what’s going to happen to NeraTel now that it has disposed of its payment solutions business? Here are four things you need to know:
1. Expect revenues to be ‘lumpy’
The payment solution business collects leasing fees whenever they rent its payments terminal to merchants, which gives NeraTel a source of stable, recurring revenue. After the sale of the payment solution business, NeraTel’s revenues should become more ‘lumpy’ as the core network infrastructure business is project-based in nature.
2. Average annual earnings will fall to $11.1 million
|in S$ millions||2011||2012||2013||2014||2015||Normalized earnings|
|Earnings (excluding one-off gains)||8.9||16.5||16.4||15.4||12.8|
|Earnings after sale of payment solutions business unit||7.0||13||13||12.2||10.1||11.1|
In the table above, I excluded one-off gains for NeraTel’s earnings before the sale of its payment solutions business to be conservative. Since the payment solutions business comprises around 21% of earnings, I then subtracted that portion to calculate NeraTel’s estimated earnings after the sale of its payment solutions business. Then NeraTel’s normalized earnings over the last five years works out to $11.1 million.
Do note that the recent nine-month results also show a drop in NeraTel’s profit despite an increase in revenue. This is due to lower profit margins from equipment sales and the devaluation of the Nigerian naira against the U.S. dollar.
3. Dividend per share should be at 2 to 2.5 cents
NeraTel has a history of paying out a majority of its earnings as dividends. Even with average earnings at $11.1 million, the company should still be able to pay a dividend of 2 to 2.5 cents per share as that works out to $7.2 million to $9 million in dividend payout. So there’s some headroom even if FY2016 profits decrease – which is expected to.
Based on the current price of 41 cents (as at 19 December 2016), the dividend yield should range between 4.9% and 6.1%.
4. Expect debt to reduce
Most of the company’s debts were due to the payment solution business as to fund the purchase of payment terminals. With that business sold, we should see debt levels to reduce because the network infrastructure business is by and large project-based.