Nera Telecom (Hold - Downgrade from BUY)
Price Target : 12-Month S$ 0.48 (Prev S$ 0.55)
Story:
Net profit of S$2.65m is up 10% up y-o-y is lower than our expectation of S$3.0m mainly due to lower turnover. On the other hand, cash collection was very strong for the quarter.
Point:
We have adjusted NeraTel’s FY08 earnings estimates by 9% downwards in the light of current set of results and the possibility of slowdown in IT spending in the near future. Final FY07 dividend of 4 cents, goes ex-date on 30 Apr 08 and the stock price could adjust downwards in the absence of additional catalysts.
Lower turnover was the main culprit.
Lower than expected turnover of S$39.0m rose by only 7% y-o-y although gross margins over 23% compensated to some extent. The company attributed this to slippage in some contracts to 2Q08 due to logistic issues, and we expect the company to report net profit of over S$3.0m in 2Q08.
Significant increase in cash from reduction in receivables. NeraTel generated S$29m of cash from operating activities compared to S$0.6m cash deficit last year. This was due to solid recovery of S$27.8m in cash from its trade debtors during 1Q08. At this time, NeraTel has about S$50.6m in cash (~14 cents cash per share).
Relevance:
Based on 12x FY08 earnings, our one-year target price is S$0.48and we downgrade to HOLD. The stock has outperformed the market in the last four months but may not continue to do well due to the absence of catalysts. On the positive side, balance sheet is very strong with 14 cents cash per share.
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