Would Peter Lynch Buy Nera Telecoms?

Nera LogoIn the grand scheme of things, Nera Telecommunications (SGX: N01) is not a SingTel, a StarHub or a M1. But what it lacks in size, it more than makes up for in terms of potential.

Nera Telecoms, in a nut shell, links its clients up with satellite, microwave and radio frequency communications. Its customers span the length and breadth of Asia and South East Asia. They include countries such as Myanmar, Vietnam, Thailand and Malaysia.

Over the last ten years, revenues have barely grown. In 2003, annual turnover stood at S$168m. A decade later, turnover was S$178m. That is unlikely to impress Peter Lynch too much. Meanwhile, bottom-line profits have improved from S$13m to S$23m, which would suggest an earnings growth rate of about 6% a year.

Interestingly, the company is valued at about 12 times historic earnings. On that basis, the Price-to-Earnings-to Growth (PEG) ratio is 2, which is probably higher than Peter Lynch would like. In the main, Lynch warms to companies whose PEG ratio is less than 2, which would imply that potential earnings growth has not been built into the stock price.

Lynch is also on the lookout for companies with plenty of cash and low debt levels. On this measure, Nera Telecoms scores highly. It has no debt and a cash pile of almost S$42m.

Dividends are another thing that Peter Lynch would look at closely. Since 2003, Nera has lifted its payout from S$0.01 per share to S$0.06 per share last year. The payout ratio last year equated to over 97% of earnings, which is likely to worry Peter Lynch. His concern could be whether the company has retained enough earnings to allow it to grow significantly over time.

Nera Telecommunications is a profitable business. It is also highly efficient in the use of its assets to generate sales. However, it probably needs to grow faster to attract the interest of Peter Lynch.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore Director David Kuo doesn’t own shares in any companies mentioned.