(NEUTRAL, S$0.345, TP S$0.34)
2Q11 results fell slightly short of estimates; valuation appears fair. Nera
Telecommunications (NeraTel) posted a weaker than expected results, with S$2.5m in net profits (-16.1% YoY) on the back of S$35.8m in revenue (-6.0% YoY). The increase in gross margin (+2.1 ppts) was due to more maintenance service rendered and increase in distribution and selling expenses (+52.1% YoY), attributable to higher labour costs. We believe 2H performance will be stronger, driven by the fast growing network infrastructure business. The stock is currently trading at 11.4x FY11F P/E, and the share price had remained unaffected despite the recent market sell-off for the month of Aug (STI: -13.5%). We attribute this to its high dividend yields (>10% in FY10), as NeraTel had been consistently paying out more than what it earned for the past five years. Maintain NEUTRAL as the valuation appears fair, with a lower TP of S$0.34 pegged to 11.1x 5-yr average forward P/E. The potential legal claim is a key risk to our earnings estimates.
Tapping on the network infrastructure boom. According to the latest Cisco Visual Networking
Index (VNI), the global internet traffic is forecasted to quadruple by 2015 reaching 966 exabytes per year (one billion gigabytes). Asia Pacific will lead the growth, generating the most IP traffic, driven by 1) more mobile internet devices, 2) increasing usage of video content and 3) growing netizens. As such, we believe that NeraTel is able to tap on the booming telecom equipment market, which is forecasted by Gartner to hit US$571.7billion by 2015. With the flexibility and capabilities of bringing in the right mix of high performance products, the group is well armed to cater for different service providers’ needs.
Pending legal claims. NeraTel was sued by MBF Cards Ddn Bhd (MBF) in Feb 2011 for an
amount of approximately S$17.1m, representing 156.7% of FY10 net profit. While management
believe that they have a case, we believe that an out-of-court settlement amounting to a fraction of the amount is likely.
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