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Neratel–Is their cash flow really recurring?

I have got to admit that I missed Neratel. We have the chance to buy it at 40 cents or 50 cents for  a fat dividend yield of 10% or 8% and we let it slipped.

The primary reason why I didn’t buy is that

  • I cannot sense a conservative dividend that they are able to pay comfortably at a recession scenario
  • Being somewhat in a similar nature industry, I always thought that they are an order book based business, and that there isn’t much information to the recurring nature of the cash flow

So now I would like to revisit this premise and call out to people in the telecom industry, infocomm and payments industry to see if they can help us make sense of this.

They say that 45% of current revenue is recurring but I cannot pin point how that is made up.

Telecom Segment

The simple premise is that they are a systems integrator of third party satellite, microwave and broad casting solutions to the Singapore and emerging markets telecoms.

The trend is that as data usage grows, the telecom operators will consistently need to invest in a stream of these equipment to maintain or expand their capacity.

It is highly competitive and they are not the only one selling

  • Do these telecom equipment really break down so frequently?
  • Do they change or upgrade these equipment so readily?
  • Do the telecom companies purchase these equipment from Nera so that Nera earn a certain percentage of margin?
  • Or are they purchase as an integrated solutions with a maintenance component?
  • If there is usually a maintenance component is it a firm fixed price based contract or cost based contract?

Network Equipment Segment

The network equipment is rather similar to the broad casting solutions. It caters to the same group of customers, but due to the nature of it, they can be for other industries as well.

This is group under Neratel’s Infocomm segment.

The question here is almost the same as that of the Telecom Segment

  • Are these networking equipment used at telecom more robust that their mean time between failure is much much lower?
  • Do they change or upgrade these equipment so readily? My thoughts are yes they do due to better technologies that can be more cost effective
  • Do the telecom companies purchase these equipment from Nera so that Nera earn a certain percentage of margin?
  • Or are they purchase as an integrated solutions with a maintenance component?
  • If there is usually a maintenance component is it a firm fixed price based contract or cost based contract?

Payment Solutions Segment

This for me is the next growth area. An integrated payments solution that links up a customers decentralized operations.

Neratel earns by selling the POS solution by per unit or that they lease out and earn royalties from customers that chose this path.

In fact their latest Q1 capex shows that  they spent 7 mil to build up the equipment to lease out.

7 mil of capex is a lot. The last time they spent so much (more than average 4 mil was in 2002!

Some thoughts

  • The switching cost of these payment  solutions should be rather high. When it comes to payment you want a method that is reliable. Once you have it integrated you are less likely to switch it
  • Are Neratel’s solution forward looking when it comes to taking advantage or addressing WIFI based payment?
  • How would digital wallets and digital reward card affect them? From what I know their solution seems to be forward looking that it can be internet based and takes advantage of the digital wallets concept
  • Can I be mistaken that most customers would only want to buy these POS devices, whether they are normal or NFC capable one and not implementing the full system? Because that will affect the  stickiness a lot
  • Or are they purchase as an integrated solutions with a maintenance component?
  • If there is usually a maintenance component is it a firm fixed price based contract or cost based contract?

Some Segmental Data

Revenue for Infocomm (network equipment and payment services) look really good after the dot com bust which is on a steady rise.

Telecom equipment have been doing badly but in 2012 it picked back up.

What we see in 2013 first quarter is that its not doing as well again.

As a point of reference take note that to pay a 4 cent dividend they  would require roughly 14.4 mil

The profit from Telecom segment have fluctuate around the 6 mil range.

The Infocomm segment is the  one that have been adding 5-6 mil as well from 2001 to 2008 and then picked up to 10 mil recently.

The recent high coincide with 2011 push into Morocco and Afghanistan

 

Margins are rather crazy and it will seem Infocomm have a better and more consistent margins, which also picked up with recent overseas drive into newer markets.

Free Cash Flow

Capex have largely been 4 mil or less. There are 2 years where operating cash flow was negative, which perhaps is the reason I gave it a miss initially.

At this juncture, FCF definitely looks better in recent years, the fear is that maybe I don’t know the industry that well. Would a revisit to poorer cash flow be on the cards and if it will how badly will they fare?

Or have the recurring cash flow profit change somewhat in recent years?

Summary

As you can see, much doubts there. Seriously hope someone will be able to guide me on this.

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Edison

Friday 10th of May 2013

Lol market understand it much better after my report and roadshow :D

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