Nera Telecom

Nera Telecom($0.795): disappoints severely, EPS is 0.96 cents meeting only 14.8% of Bloomberg’s full year EPS estimates. 2Q14 profit was reduced by two thirds y/y to $3.5m. Stripping one-off negative goodwill in 2Q13, core profits rose 0.9% y/y in 2Q14 against 7.2% drop in turnover to $43.8m, but still fall short of expectations. Gross profit margin improved 1.5ppt to 32.3%. The $0.4m decrease in gross profit due to lower revenue was completely compensated by $0.4m increase in other operating income in the form of FX gains. Fixed operating costs were reduced by 2.0% to $9.8m. Among three equally important business segments, revenue from telecom and network infrastructure decreased 14.8% to $16.4m and 4.3% to $17.8 respectively, only payment solution registered small y/y gains of 2.9% to $9.6m. The lacklustre sales performance is due to lumpy project recognition in Morocco for telecom segment and delay in customer order in network infrastructure segment. Looking ahead, revenue recognition from Nigeria is expected to come in 2H14, bumping up turnover in telecom sector. The management believes its diversified geographical reach and presence in emerging markets, together with the three key pillars of revenue sources, helps to build resilience in revenue over time. Growth in data and video traffic, smart devices, payment business, and even regulatory compliances are all factors set to drive up demand for all its three segments. Nera has strong balance sheet with zero debt and strengthening cash position (Jun14 $29.1m vs Jun13 $25.4m). Interim dividend is maintained at 2 cents, yielding 5.03%, and annualized 2Q14 P/E is 20.7x.