(BUY, S$0.35, TP S$0.47)
Upgrade to BUY. NeraTel’s 3Q results are in line with our estimates, with net profits coming in at S$2.7m (+76.5% YoY) on the back of revenue of S$36.6m (+0.8% YoY). We expect 4Q net profit to be better than last year’s S$4.2m, driven by strong growth in contribution from the Middle East and North Africa (MENA) region. We upgrade the counter to BUY due to 1) strong demand from MENA, 2) solid financial position with steady cash inflows and 3) high dividend yield with a potential for a special payout. New intrinsic value of S$0.47 based on Dividend Discount Model (WACC: 11.1%, Terminal growth rate: 0.0%) implies an upside of 33.5%.
Strong growth potential in the MENA region. Retaining over 40 experts from the MENA telecommunication business takeover earlier this year has its benefits. NeraTel has since secured tens of millions worth of orders. We are expecting the group to complete S$25.5m worth of orders in MENA in the coming 4Q, with one third being services in nature, and thus yielding higher gross margin (>40%). Post war construction in Afghanistan and the recent flood in Thailand, where NeraTel has an existing presence, should provide further opportunities.
Rock-solid financial position. Assuming it pays out S$14.5m in dividends as in the past (4.0 S¢/share), NeraTel would still have a net cash pile of S$47.5m (13.1 S¢/share). This is mainly attributable to NeraTel’s ability to leverage on its hardware suppliers, resulting in an efficient cash conversion cycle.
A sign of special dividends. We expect NeraTel to maintain its 4.0 S¢/share payout, translating to a yield of 11.4% based on S$0.35. We also observed that the last time cash was above S$50m in 2005, a special dividend (15.0 S¢/share) was announced, though a huge portion of it came from the disposal of business. Nonetheless, another special distribution may be on the way as management indicated that they are comfortable working with a cash position of S$20m.
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