Sunday, February 12, 2012

Loss of my favourite dividend child - Nera Telecommunications

I like to own companies that pay good dividends. I view them as my children. These children pay me annual allowance for my living expenses.

The best children are those with growing income and pay me a reasonable percentage of their income as dividends. This percentage should not be so high until their own growth is stunted because they are not reinvesting enough of their profits back into the business. This percentage should also not be so low until I have problems paying for my living expenses. No parents like children who are stingy with their allowance despite earning fat salaries. A fast-growing income means that the children can afford to pay me rising, comfortable allowance without holding back their own wealth accumulation or even putting themselves into hardship. These are the best sort of companies to buy for dividends. They are very hard to find but if you can find them, they will not only deliver consistent dividends but good capital gains as well.

I do not like children who pay me generous allowance when times are good and ask for the money back (and more) from Papa when bad times hit. These children share a common name. Not all of them behaved this way but quite a number of them did in the credit crisis of 2008. The name of these children is REIT. I forgave them because the law stipulates that they have to pay at least 90% of their income as dividends which means they may not have enough internal cash to put back into the business. It is not their fault but this defining characteristic means the sustainability of dividends paid by REITs is questionable. I will consider buying REITs on a depressed basis when bad times hit and after they have raised money from other people.

One of my favourite child is Nera Telecommunications. Although this child does not enjoy growing profits, it has been able to pay out very generous dividends because of its strong, consistent cashflow. See the table below to judge how filial this child has been to me for the past 8 years.


Year
Dividends per share (cts)
Dividend yield based on price at beginning of year(%)
Stock price at beginning of year when dividend is paid
2003
2.875
7.65%
$0.376
2004
2.875
9.36%
$0.307
2005
3.245
9.69%
$0.335
2006
18
47.37%
$0.38
2007
4
10.26%
$0.39
2008
3
15.79%
$0.19
2009
3
7.89%
$0.38
2010
4
10.81%
$0.37
2011
6
13.95%
$0.43



For the past 8 years, Nera Telecommunications have been paying dividends with yields ranging from 7.65% to 47.37% (yes it's 47%, no typo error). On a growth basis, NeraTel is not impressive. In fact, the book value has been sliding down since 2003. Its earnings has been quite flat over the years too with earnings per share hovering at around 3cts per share. PE ratio is not impressive at an average of 17 for the past 4 years. So, one way to interpret this is that NeraTel has been sacrificing growth to pay generous dividends to its shareholders. So shareholder-friendly. Such a filial child.

A good question to ask at this point is whether the dividends are sustainable. Since dividends are paid from hard cash and not accounting profits, it is better to look to the cashflow statement rather than the income statement for the answer. NeraTel's operating cashflow grew 15% in 2010, 16% in 2009 and a whooping 80% in 2008. The absolute amount of the operating cashflow is comfortable enough to cover the generous dividends. Based on the cashflow numbers, there is good reason to believe that the generous dividends are sustainable in the years ahead. There must be something about the business being a cash gusher that enables it to have a consistent track record of paying generous dividends for 8 years throughout good and bad times.

On 10 Feb 2012, ST Electronics made an announcement to buy my favorite child away. The price offered is $0.45 cents per share. The actual price paid by the Acquiror is only $0.39 excluding 6cts of dividends that will be paid by NeraTel.

Is the offered price $0.39 too cheap? If the worth of a company is the sum of its future cashflows, then NeraTel is surely worth more than $0.39 based on its strong, consistent, stable dividends in the past decade. In fact, the dividends that NeraTel paid in the past 7 years alone already exceeds $0.39 which is the offered price today. ( I hope any potential acquirer will take note of this point) Now, ST Electronics wants to pay only $0.39 to swallow up all the future dividends for decades to come.

This cheap $0.39 offer comes at a time when the no-growth baby is starting to show some growth after expanding their Telecom business to new markets in Middle East and North Africa. In the latest announcement for FY2011, NeraTel net profits grew 23.9% and increased its already high dividends by 50% to 6cts per share.

Some may ask, if NeraTel is really worth that much, why is its biggest shareholder Eltek selling it so cheap? The answer is found in their balance sheet for FY2010. Eltek has NOK600m debt versus NOK6.8m cash. With the ongoing European sovereign crisis, it is not surprising Eltek is hard up for cash and has to sell its assets cheap to raise cash.

It is very hard for me to find a better child than NeraTel. Nera Telecom has been a good child to many minority shareholders. Don't insult me with a cheap price tag. I will vote no! How about the rest? What say you?

Disclosure: This post has been written with vested interest.

32 comments:

  1. great stock.i didnt get invested but if u value it based on 10 years of 6 cents it is definitely too cheap.

    ReplyDelete
  2. Hello. This is a good post. The stock stop rising in terms of share price for quite a while but like what you have written, it has been consistent with dividends.

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  3. After selling off it's contract manufacturing subsidiary in 2006 - that's where the special dividend of 15 cents were added to the normal dividend of 3 cents - Nera Telecoms became asset light.

    As a solutions provider or distributor, it does not need to spend money to make money - unlike the telcos who need to constantly invest and upgrade their infrastructures. Hence the free cash flows for juicy dividends.

    That's why I chose Nera Tel over the other 3 telcos for my telcoms dividend play ;)

    When Nera Tel expanded their distribution rights to the North Africa and Middle-East market last year, I thought finally they can show some earnings growth. Which did happen with the increased dividends to 6 cents in 2011! Now STE is trying to steal the candy from us - with the blessing of the biggest shareholder who must be desperate for cash.

    Hyom, your "appeal" should be to the sellers or other shareholders. People like you and me.

    If I am a buyer or acquirer, why would I pay more if I can get it for less? Would you?

    Vote no ;)

    ReplyDelete
  4. Hi Jared,

    You raised good points. You are a better investor. You bought NeraTel in 2003 and held it until now. 五体投地.

    I will vote no. I have modified my original post to convey my deepest displeasure with the cheap price tag. It is an insult!

    ReplyDelete
    Replies
    1. No lah!

      I just happened to be the blind cat that caught a dead mice.

      I come and support you for your great post on Nera Tel - writing in metaphor some more. I like! I vested interest too mah!

      Was pleasantly surprised we have so many co-incidences?

      LOL!

      Delete
    2. Haha. Talking about writing in metaphors, you are the master in this technique! Those who read your blog will know.

      Delete
    3. Now U have a new offeror at 49cents when profits of Nera Telecom is rising.and the market price is above 50c.Is this new offeror serious or just out to get control since they may not want to put in more money to launch a serious offer and still have the shares listed.
      I hope we have others coming in like the F&N saga.As pointed out by hyom hyom the shares are worth much more than at present prices of 50+cents.I personally feel 60 cents and above would be fair price.
      Fair value investor.

      Delete
    4. Agree. 49 cents is a cheap sales. Today they managed to mop up about 1.5m shares from open market. My take is 70 cents for a fair price. I'd be voting 'no'.

      Delete
  5. Hi HYOM,

    I am not into Singapore stocks but I love reading your blog. Maybe in the near future, when I am ready to expand, I will enter Singapore stock. However, I would like to comment (this is just a general comment since I have not read NeraTel's Financial Statement).

    Looking at PE of 17, it is not a cheap stock. You also said that book value has been declining while increasing its dividend. So my pre assumption is that it has been increasing its debt. You also said that operating cashflow has been growing rapidly. Remember, operating cashflow can be manipulated.

    Therefore, just by reading those number, I cannot conclude how good is its financial. You need to look closer to make sure that there is no financial manipulation ie manipulating its operating cashflow, manipulating its reported earning.

    At the sametime, My pre assumption, on the whole, the company is not cheap and NeraTel is risking itself of being redundant unless it invest itself. Being in the telecom business needs high expenditure on capital or risk into technological obsoluteness. I can see that it pays high dividend because the largest shareholder needs the cash to pay its own debt and risking NeraTel to underinvestment.

    Perhaps STE will be able to supply NeraTel with lots of cash for new investment so that NeraTel can survive. In this case, the largest shareholder might be doing in the best interest for NeraTel. As for the price, it is expensive remembering that PE 17 is pricey and the new shareholder needs to inject more money to keep NeraTel alive.

    Unfortunate for minority shareholders as they are losing high dividend payment. But perhaps, in the future, it is better this way than to face price depreciation due to technological obsoluteness which will reduce NeraTel's earning power.

    ReplyDelete
    Replies
    1. You need to look closer to make sure that there is no financial manipulation ie manipulating its operating cashflow, manipulating its reported earning.


      Hi Andreas,

      Thanks for dropping by. Financial statements can be manipulated in any single year but it is much harder to manipulate it over a long period stretching more than 3 years.

      Besides, unlike financial statements which are partially opinions of accountants, dividends are paid from cold, hard cash. How can a company manipulate that? Although it is possible to put on a show to impress shareholders by paying generous dividends, it is not possible to sustain this show by paying generous dividends for 8 years. In fact, NeraTel paid so much dividends that the past 7 years of dividends alone already exceed the current takeover offer price.

      Delete
  6. Good thinking, I try to provide answer. In this case I have to re read a book that I've read a couple of years ago. It is titled Financial Shenanigan by Howard M. Schilit. It is a good book that always been updated with the latest financial shenanigan.

    Dividend from hard cash cannot be manipulated as the company will pay its dividend as it says. However, the number on the company's reported operating cashflow can be manipulated. The book give some example about shifting financing cashflow into the operating cashflow. An example from the book would be to use inventory (read Asset for NeraTel)as a collateral for bank's borrowing and promise the bank that the inventory will be bought back later. Perhaps with the promise to buy it back with an interest. That way, the company will record the cash it gets from "loan" into its operating cashflow arguing to its shareholders that it has sold its inventory, or asset. It should, however, recorded the cash in investing cashflow.

    I am not sure why it happens but it really does happen.

    I am not saying that NeraTel is manipulating its Financial Statement. However, we must be vigilance, especially as a minority shareholders.

    As with high dividend, and as you said previously, indeed NeraTel has been sacrificing growth for high dividend. Too much sacrifice as to become prey to another takeover. I think the management and the board of director is to blame. How can they let NeraTel to under-invest and paid so much dividend? Those high dividend can be used to pay back its own debt (not its largest shareholder's debt) and re invest in itself.

    ReplyDelete
    Replies
    1. Hi Andreas,

      Thank for your well thought-out reply. By the way, are you an Australian or a Singaporean who has migrated to Australia?

      As you already know, it is hard to manipulate financial statements without leaving behind traces. Boosting the figures here will weaken the figures in other places. Unless the company is so shameless as to commit outright fraud like fabricating non-existent cash, the careful investor (maybe someone who has read Financial Shenanigans by Howard M. Schilit like you) stand a good chance of detecting manipulation. NeraTel is not a S-chip where the assets and management are in China. There is little the Singapore regulator can do to the China companies listed here. The recent China Sky episode is a good example that shows the Singapore regulator is a toothless tiger when it comes to enforcing its rules on errant foreigners.

      Delete
  7. Hi Hyom,

    I am Indonesian. I've lived in Australia & Singapore before. I love Singapore, it is one of my favourite city.

    It is great to have someone to share idea with. Hopefully soon when I get a chance to enter SGX, we can share investing idea. Also, I'd like to enter the American market but it is still a dream at the moment.

    ReplyDelete
  8. Your post was mentioned on TheEdge magazine Mar 5, 2012 edition. Interesting perspective on Nera Telecommunications. You place emphasis on dividends but I am surprised you do not seem to like REITs.

    ReplyDelete
  9. i understand that the deal would be decided by the votes of hands at the EGM regardless of the shares you are holding. So may be the minority share holders should attend and vote for "NO" ... :)

    ReplyDelete
  10. Great job! The scheme has been voted down. Congratulations to shareholder power for the retail investors. The number of shareholders voting against the scheme is more than the number voting in support of it. We have won.

    http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_5EC4B16790C5776D48257A320026DD71/$file/RESULTS_OF_THE_SCHEME_MEETING.pdf?openelement

    ReplyDelete
  11. I think the scheme is down becos ALTEK voted against it as ST failed to bid more than 0.475

    ReplyDelete
  12. No, Altek voted for it.

    The "scheme" (typically used by distressed firm trying to delist) has a 2-part vote -- ie, BOTH parts must vote FOR the scheme to succeed:

    part 1: majority of SHAREHOLDERS present must approve the scheme
    part 2: at least 75% of the SHARES present must approve the scheme

    So to defeat the scheme:
    just need 50.01% of SHAREHOLDERS present at the meeting to vote AGAINST
    or
    just get 25.01% of SHARES present at the meeting to vote AGAINST

    The actual results:
    # of shareholders % of shareholder # of shares % of shares
    present present present present
    --------------- -------------- ---------- ---------
    FOR: 139 42.6% 220,708,503 93.1%
    AGAINST: 187 57.4% 16,336,000 6.9%
    ------------------------------------------------------------
    Total: 326 100% 237,044,503 100%

    As you can see, 57.4% of shareholders present at the meeting voted AGAINST the scheme -- enough to defeat the scheme even though those voting FOR the scheme had 93.1% of the votes present.

    Important: only 65.5% of the Nera shares outstanding voted at the meeting (237,044,503 / 361,897,000 = 65.5%). So 34.5% of the shares were not present at the meeting.

    So next time, the minority shareholders MUST try to attend (or appoint proxy to attend) as their presence and votes CAN count for schemes like this (under Section 210 of the Companies Act, Chapter 50, Singapore).

    P.S. Someone else (not me) posted a nice screen shot at http://www.valuebuddies.com/thread-1810-post-27744.html#pid27744

    ReplyDelete
  13. No, Altek voted for it.

    The "scheme" (typically used by distressed firm trying to delist) has a 2-part vote -- ie, BOTH parts must vote FOR the scheme to succeed:

    part 1: majority of SHAREHOLDERS present must approve the scheme
    part 2: at least 75% of the SHARES present must approve the scheme

    So to defeat the scheme:
    just need 50.01% of SHAREHOLDERS present at the meeting to vote AGAINST
    or
    just get 25.01% of SHARES present at the meeting to vote AGAINST

    The actual results:

    FOR:
    139 (42.6%) of shareholders voted at meeting
    or 220,708,503 (93.1%) of shares voted at meeting

    AGAINST:
    187 (57.4%) of shareholders voted at meeting
    or 16,336,000 (6.9%) of shares voted at meeting

    Total:
    326 of shareholders voted at meeting
    or 237,044,503 of shares outstanding voted at the meeting

    As you can see, 57.4% of shareholders present at the meeting voted AGAINST the scheme -- enough to defeat the scheme even though those voting FOR the scheme had 93.1% of the votes present.

    Important: only 65.5% of the Nera shares outstanding voted at the meeting (237,044,503 / 361,897,000 = 65.5%). So 34.5% of the shares were not present at the meeting.

    So next time, the minority shareholders MUST try to attend (or appoint proxy to attend) as their presence and votes CAN count for schemes like this (under Section 210 of the Companies Act, Chapter 50, Singapore).

    P.S. Someone else (not me) posted a nice screen shot at http://www.valuebuddies.com/thread-1810-post-27744.html#pid27744

    ReplyDelete
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  17. Wonderful call on Nera Telecommunications. Thanks for bringing my attention to NeraTel. I did my own research after reading your article and bought it after Nera plunged when shareholders rejected the takeover deal.

    Today, I am sitting on gains >40% if you count on the dividends(>10% yield for me) collected this year. Thanks again.

    ReplyDelete
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