Company Update, 5 August 2013

Neratel (NERT SP)

Buy (Maintained)

Technology - Telecommunications Market Cap: USD218m

Target Price: Price:

SGD0.93 SGD0.77 Macro Risks

Selldown Unwarranted As Share Sale Misconstrued

Growth Value

Neratel (NERT SP) Price Close

Relative to Straits Times Index (RHS)

0.90

208

0.80

188

0.70

168

0.60

148

0.50

128

0.40

108

0.30 12

88

  2  . 1 0 . 2

   

0 0 . 2 0 0 The market has reacted negatively to the recent sale by NeraTel CEO Mr . 0 Samuel Ang of all the company’s shares under his name. To the 0 contrary, however, our checks show that Mr Ang actually raised his 0 stake as the parent PE fund, Northstar, has allowed him to hold a bigger stake in NeraTel as an incentive to retain him. Reiterate BUY, with a higher SGD0.93 TP, based on a 11.4x blended FY13/14 P/E (+1 SD).



Market misconstrues sale; CEO effectively raises stake. We believe that the market has misconstrued the shares sale by NeraTel CEO, Mr Ang, and missed one detail. While Mr Ang has disposed of all shares under his name, he now has interest in Asia Systems Ltd (Northstar’s investment vehicle), the largest shareholder in NeraTel. In line with Northstar’s interest to offer incentives and retaining Mr Ang, our checks show the CEO has effectively increased his stake in NeraTel.

10



8

6

Jun-13

Apr-13

Feb-13

Dec-12

Oct-12

2 Aug-12

Vol m

4

Source: Bloomberg

Avg Turnover (SGD/USD) Cons. Upside (%) Upside (%) 52-wk Price low/high (SGD) Free float (%) Shareholders (%) Northstar

1.06m/0.84m -6.5 21.6 0.41 - 0.83 47



Northstar’s shining track record enhances long term prospects. Northstar, the parent of NeraTel, is an Indonesian USD1.2bn private equity firm with a long and solid track record in partnering with institutional giants such as GIC and TPG. Its recent deals are the Indonesian national bank TPN’s exit, from which sources confirm that Northstar stood to make a 7x gain. Similarly, Northstar has also set a target for NeraTel to double its profits in three years. As such, we deem NeraTel’s future still bright. Expecting strong 2QFY13 results. We expect the company to continue with its trend of delivering solid results in 2QFY13. The strong core profits will be underpinned by full contribution from Nera Malaysia as well as spillover revenue from the telco projects delivered in 1Q. The group is also expected to recognize the exceptional gains arising from Nera Malaysia’s acquisition in this quarter, which will boost the final numbers.

53.0

Shariah compliant

Forecasts and Valuations

Dec-10

Dec-11

Dec-12

Dec-13F

156

156

179

211

253

Reported net profit (SGDm)

10.9

13.5

19.4

30.2

28.9

Recurring net profit (SGDm)

10.9

13.5

19.4

24.5

28.9

2.3

23.8

43.6

26.2

18.1

Core EPS (SGD)

0.03

0.04

0.05

0.07

0.08

DPS (SGD)

0.04

0.00

0.08

0.04

0.04

5.2

0.0

10.5

5.2

5.2

Total turnover (SGDm)

Recurring net profit growth (%)

Dec-14F

Edison Chen +65 6232 3892

Dividend Yield (%)

[email protected]

Core P/E (x)

25.4

20.5

14.3

11.3

9.6

Return on average equity (%)

17.5

21.9

30.5

41.0

32.5

P/B (x)

4.45

4.52

4.20

3.39

2.88

P/CF (x)

11.7

10.5

17.5

12.5

10.8

EV/EBITDA (x)

13.7

11.7

8.4

6.4

Terence Wong CFA 65 6232 3896 [email protected]

Net debt to equity (%)

net cash

Our vs consensus EPS (%)

net cash

net cash

net cash 0.0

5.3 net cash 0.0

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

Powered by Enhanced Datasystems’ EFATM Platform

1

Neratel (NERT SP) 5 August 2013

Financial Exhibits Profit & Loss (SGDm)

Dec-10

Dec-11

Dec-12

Dec-13F

Total turnover

156

156

179

211

253

Cost of sales

(119)

(112)

(123)

(145)

(173)

Gross profit

37

45

56

67

81

Gen & admin expenses

(8)

(8)

(10)

(11)

(13)

(17)

(25)

(25)

(29)

(34)

2

5

3

3

2

Operating profit

14

16

23

30

35

Operating EBITDA

17

19

26

34

40

Depreciation of fixed assets

(3)

(3)

(3)

(4)

(4)

(0)

(0)

(0)

(0)

14

16

23

30

35

Net income from investments

1

1

1

0

Interest income

1

0

0

0

0

Interest expense

(0)

(0)

(0)

(0)

(0)

Selling expenses Other operating costs

Amortisation of intangible assets Operating EBIT

Exceptional income - net

-

-

-

-

7

Dec-14F

-

-

Pre-tax profit

15

16

24

37

Taxation

(4)

(3)

(4)

(7)

35 (6)

Profit after tax & minorities

11

14

19

30

29

Reported net profit

11

14

19

30

29

Recurring net profit

11

14

19

24

29

Dec-10

Dec-11

Dec-12

Dec-13F

Dec-14F

14

16

23

30

35

Depreciation & amortisation

3

3

3

4

4

Change in working capital

9

9

(8)

(5)

(7)

Source: Company data, OSK-DMG estimates

Cash flow (SGDm) Operating profit

Other operating cash flow Operating cash flow Interest received Interest paid

1

1

0

27

29

19

29

-

1

0

0

0

0

(0)

(0)

(0)

(0)

(0)

32

Tax paid

(4)

(3)

(3)

(7)

(6)

Cash flow from operations

24

26

16

22

26

Capex

(2)

(4)

(4)

0

(1)

0

Other investing cash flow Cash flow from investing activities Dividends paid Other financing cash flow

(5) -

(6) -

(2)

(6)

(4)

(5)

(6)

(11)

(14)

(14)

(14)

(14)

(0)

(0)

-

-

-

(11)

(15)

(14)

(14)

(14)

Cash at beginning of period

29

40

47

44

53

Total cash generated

11

6

(3)

3

Forex effects

(0)

0

(0)

Implied cash at end of period

40

47

43

Cash flow from financing activities

46

5 58

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

2

Neratel (NERT SP) 5 August 2013

Financial Exhibits Balance Sheet (SGDm)

Dec-10

Dec-11

Dec-12

Dec-13F

Dec-14F

Total cash and equivalents

40

47

44

53

58

Inventories

25

24

25

29

35

Accounts receivable

39

56

56

65

79

Other current assets

10

3

4

4

4

Total current assets

114

130

129

152

176

Total investments

2

2

3

3

3

Tangible fixed assets

7

8

9

10

12 1

Intangible assets Total other assets Total non-current assets Total assets

-

1

1

1

1

3

2

2

2

10

14

15

16

18

123

143

144

168

194

Accounts payable

37

54

49

58

69

Other current liabilities

24

28

29

29

29

Total current liabilities

61

82

78

87

0

0

-

-

-

-

-

-

Other liabilities Total non-current liabilities

98

0

0

Total liabilities

61

82

78

87

98

Share capital

30

30

30

30

30

Retained earnings reserve

35

34

39

54

69

Other reserves

(2)

(2)

(3)

(3)

(3)

Shareholders' equity

62

61

66

82

96

Total equity Total liabilities & equity

62

61

66

82

96

123

143

144

168

194

Source: Company data, OSK-DMG estimates

Key Ratios (SGD)

Dec-10

Dec-11

Dec-12

Dec-13F

Dec-14F

Revenue growth (%)

(9.3)

0.3

14.5

18.1

20.0

Operating profit growth (%)

11.5

14.0

45.5

30.1

18.8

Net profit growth (%)

2.3

23.8

43.6

55.8

(4.3)

EPS growth (%)

2.3

23.8

43.6

55.8

(4.3)

Bv per share growth (%)

0.0

(1.6)

7.5

23.9

17.7

Operating margin (%)

8.9

10.1

12.8

14.1

14.0

Net profit margin (%)

7.0

8.6

10.8

14.3

11.4

Return on average assets (%)

9.2

10.1

13.5

19.4

16.0

Return on average equity (%)

17.5

21.9

30.5

41.0

32.5

(64.2)

(76.0)

(66.4)

(65.5)

(60.9)

DPS

0.04

0.00

0.08

0.04

0.04

Recurrent cash flow per share

0.07

0.07

0.04

0.06

0.07

Net debt to equity (%)

Source: Company data, OSK-DMG estimates

See important disclosures at the end of this report

3

Neratel (NERT SP) 5 August 2013

SWOT Analysis  Established track record with over 60-year brand name.

 Strong competition from the larger players.

 Provides vendor agnostic solutions in a niche market.  Rock-solid balance sheet.

 Other small consultancies looking to invade the marketplace.

 Strong ROE and robust cash flow.

 Robust telco/ internet network spending in the MENA region.  Riding on the retail industry boom in the Asean.

 Relatively small in size compared with telco and network infrastructure vendors such as Cisco and Ericsson

P/E (x) vs EPS growth

P/BV (x) vs ROAE

37%

15

25%

P/E (x) (lhs)

EPS growth (rhs)

Source: Company data, OSK-DMG estimates

Jan-14

0

Jan-13

2%

Jan-12

5

Jan-11

13%

Jan-10

10

-10%

36%

3.5

32%

3.0

27%

2.5

23%

2.0

18%

1.5

14%

1.0

9%

0.5

5%

0.0

0%

P/B (x) (lhs)

Jan-14

20

41%

4.0

Jan-13

48%

45%

4.5

Jan-12

25

5.0

Jan-11

60%

Jan-10

30

Return on average equity (rhs)

Source: Company data, OSK-DMG estimates

Company Profile NeraTel is a premier solution provider and system integrator engaged mainly in the design, engineering, sale, distribution, installation, servicing and maintenance of telecommunication systems and information technology networks.

See important disclosures at the end of this report

4

Neratel (NERT SP) 5 August 2013

Recommendation Chart Price Close

0.66

0.7

0.79

0.66 0.72

0.64 0.49

Recommendations & Target Price

0.47

0.8

NR

0.9

0.6 0.5

0.4 0.3 0.2 Buy 0.1 Aug-08

Neutral

Sell

Nov-09

Trading Buy

Feb-11

Take Prof it

Not Rated

May-12

Source: OSK-DMG estimates, Bloomberg Date

Recommendation

2013-07-01

Buy

Target Price Price 0.79

0.65

2013-04-29

Buy

0.79

0.68

2013-02-19

Buy

0.72

0.61

2013-02-08

Buy

0.66

0.58

2012-11-20

Buy

0.49

0.50

2012-10-19

Buy

0.66

0.54

2012-10-17

Buy

0.64

0.54

2011-10-17

Buy

0.47

0.36

Source : OSK-DMG estimates, Bloomberg

See important disclosures at the end of this report

5

RHB Guide to Investment Ratings DMG & Partners Research Guide to Investment Ratings Buy: Share price may exceed 10% over the next 12 months Trading Buy: Share may10% exceed over 12 themonths next 3 months, however longer-term outlook remains uncertain Buy: Share price mayprice exceed over15% the next Neutral: Buy: ShareShare price price may fall within the 15% rangeover of +/the next 12 months Trading may exceed the10% nextover 3 months, however longer-term outlook remains uncertain Take Profit: Target been attained. accumulate lower Neutral: Share priceprice may has fall within the rangeLook of +/-to10% over theatnext 12 levels months Sell: may fall has by more 10% over next 12 months Take Share Profit:price Target price beenthan attained. 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