■ Organic operating profit up 20 per cent in 2020.
■ Demand for wireless irrigation systems and 5G backhaul to drive 2021 earnings even higher.
Chief executive Moni Borovitz of Israeli-based MTI Wireless Edge (MWE:57p) was in bullish mood during our third-quarter results call. He had every reason to be, having announced a 20 per cent organic increase in operating profit to US$3m (£2.3m) in the first nine months of 2020 and reiterating full-year guidance. On this basis, house broker Allenby Capital expects a 25 per cent rise in annual pre-tax profit to US$4.3m on revenue of US$40.7m to produce earnings per share (EPS) of 2.9p and support a 25 per cent dividend hike to 2.5¢ (1.9p).
Moreover, expectations of 16 per cent EPS growth to 3.39p in 2021 are well underpinned by robust structural growth in the end markets of MTI’s technology businesses: demand for next generation 5G networks; global warming and climate change; and increased defence budget spending.
MTI sells 5G backhaul antennas to support mobile phone operators roll out their 5G networks, helping to transfer the data from mobile users to the operator’s network. The segment accounted for a tenth of MTI’s antenna division’s revenue of US$12m in 2019, and demand is set to surge in 2021, and for many years to come as operators upgrade their cellular network infrastructure to 5G. MTI has sales arrangements with four of the seven manufacturers of mobile infrastructure networks so is well placed to benefit. It’s doing just that, having recently won a US$0.5m landmark single order contract for a 5G dual band backhaul solution. Earlier this month, MTI also won a US$0.65m initial contract for military antennas with a new European customer which “has potential to become a larger customer for MTI”, says Mr Borovitz. The military segment provides a reliable income stream and enables MTI to reapply the technology developed in commercial markets.
MTI is also a smart play on climate change. World Bank estimates that 25-30 per cent of freshwater is wasted, and an eye-watering 2.8 billion people across 48 countries are expected to face water shortages by 2025. Agriculture, including the wine industry, holds the key as it is responsible for 70 per cent of all freshwater usage. MTI’s Mottech wireless water control and management system addresses water scarcity issues by providing high-end remote control solutions for water and irrigation applications based on Motorola's IRRInet state-of-the-art communication technologies. It has shown to produce a 30 per cent increase in crop yields while reducing costs from efficient use of water, fertiliser, energy and labour. Robust demand for Mottech’s irrigation systems is MTI’s main profit driver, the segment producing a 30 per cent operating profit surge in the year to date to account for half of MTI’s total profit.
New contracts won include a renewal service agreement (potential total award value of US$2.3m) with one of the five largest municipalities in Israel. The irrigation system manages over 1,000 acres of city landscapes for the municipality and has cut water wastage by half. The contract highlights the opportunity for MTI to target in the non-agricultural segment of the irrigation automation market such as sports grounds, landscaping, golf courses, municipal gardens and residential land. China and Australia are key markets for Mottech and a raft of contract wins in the regions explains why Mr Borovitz remains bullish.
Prospects for growth are well underpinned in agriculture, too. Mottech has more than 20 years experience in providing remote control solutions for vineyard irrigation management all over the world, including Australia, Italy, South Africa, South America and Israel. Irrigation of vineyards was previously forbidden or strictly controlled in France, but climate change has prompted the French authorities to allow vineyards in southern France to be irrigated. To tap into the opportunity, MTI developed and launched a new wireless irrigation solution, Tethys. Since launch in March, Mottech and its local partner, AQUADOC, have provided the system to four water associations in France who together provide irrigation water for thousands of vineyards. Mottech’s system already services 4,000 hectares of French vineyards, and is targeting an untapped market covering 200,000 hectares.
Operating under the MTI Summit Electronics brand, MTI’s third division represents 40 international suppliers of radio frequency/microwave components and sells these products to Israeli and Russian customers. It’s a highly profitable business, delivering 42 per cent higher operating profit to US$1.2m in the year to date, and one that has a “healthy order backlog”, says Mr Borovitz.
The other main take for me was the 33 per cent increase in net cash to US$8.2m (7.2p a share) year-on-year after the payment of a US$1.76m cash dividend of 2¢ a share in April. MTI’s high cash conversion rate, and a 20 per cent operating margin on incremental sales, are strong bull points. Rated on a modest cash-adjusted price/earnings (PE) ratio of 15 for the 2021 financial year, I maintain my 70p target price, having initiated coverage, at 40p, in my September 2020 Alpha Report. Buy.
Kape poised for re-rating
■ Oversubscribed placing and retail offer raises US$115m.
■ Trading update at upper end of earnings guidance.
Kape Technologies (KAPE:170p), a provider of cyber security software, has successfully raised US$115m (£88m) in an oversubscribed placing and retail offer at 150p. The company has used US$72.5m of the proceeds to buy out the two major vendors of Colorado-based Private Internet Access (PIA), the transformational acquisition Kape completed at the end of 2019. On completion of the deal, Kape paid US$85m of the US$162m consideration in cash and issued 10.5m shares to the vendors. The company was then scheduled to settle 21m of the 28m deferred share element next month.
So, to avoid a stock overhang, Kape has bought back the 10.5m shares issued and has made a cash payment to settle the deferred share element rather than issuing further shares to PIA’s vendors. There is an also additional tax-related cash benefit of US$50m over 15 years available to Kape following the change to the PIA deal structure. The remaining US$43.5m proceeds wipes out Kape’s net debt of US$25.6m and means the company is well funded to continue making selective earnings accretive acquisitions.
Kape also revealed in a brief trading update that user growth in its Privacy division hit a run rate of 14 per cent annual growth during the third quarter, and customer retention rates remain strong. The board is maintaining guidance of annual revenue of between US$120m-$123m and cash profit of US$35m-$38m. On this basis, analysts at Progressive Equity Research are pencilling in full-year adjusted pre-tax profit of US$30.9m and EPS of 14.2¢, rising to US$36.4m and 15.8¢, respectively, in 2021. Closing net cash improves to US$22m and US$31m, respectively, implying the shares are rated on a cash-adjusted PE ratio of 13 for the 2021 financial year, a low rating for a company operating in a high growth industry.
Kape’s shares are showing a healthy 256 per cent paper profit on the entry level in my 2017 Bargain Shares portfolio, albeit the price is well shy of the summer highs around 230p. However, with the potential stock overhang cleared, and the shares rated on an unwarranted three point discount to larger rival Avast (AVST), I can see scope for a much higher rating. From a technical perspective, look for a chart break-out above 180p. Buy.
|Simon Thompson's 2017 Bargain shares portfolio performance|
|Company name||TIDM||Opening offer price on 03.02.17 (p)||Bid price on 19.11.20 (p) or exit price (see notes)||Dividends||Total return (%)|
|BATM Advanced Communications (see note seven)||BVC||19.25||88.6||0||394.1|
|Kape Technologies (formerly Crossrider)||KAPE||47.9||167||3.55||256.1|
|Chariot Oil & Gas (see note one)||CHAR||8.29||9.04||0||245.0|
|Cenkos Securities (see note two)||CNKS||88.425||106||9.5||30.6|
|Manchester & London Investment Trust (see note three)||MNL||291.65||377||3.0||28.4|
|Management Consulting Group (see note five)||MMC||6.183||6||0||-3.0|
|Bowleven (see note four)||BLVN||28.9||5.5||15||-6.1|
|Tiso Blackstar Group (see note six)||TBG||55||20.2||0.54||-62.4|
|FTSE All-Share Total Return||6485||6869||5.9|
|FTSE AIM All-Share Total Return||977||1163||19.0|
|1. Simon Thompson advised selling two-thirds of the Chariot Oil & Gas holding at 17.5p on 3 April 2017 ('Bargain shares on a tear', 3 April 2017). Simon subsequently advised participating in the one-for-8 open offer at 13p a share ('On the earnings beat', 5 Mar 2018) and buying back the shares sold at 4p ('Chariot's North African adventure', 17 April 2019). Total return reflects these transactions.|
|2. Simon Thompson advised selling the Cenkos Securities holding at 106p on 3 April 2017 and the 106p price quoted in the above table is the exit price on the holding ('A profitable earnings beat', 3 Apr 2017). Please note that Simon has since included the shares in his 2020 Bargain Shares Portfolio and rates the shares a buy ('exploiting cash rich value plays', 21 May 2020).|
|3. Manchester and London Investment Trust paid total dividends of 3p a share on 2 May 2017. Simon Thompson then advised selling half of the holding at 366.25p on 26 June 2017 ('Top slicing and running profits', 26 June 2017), and selling the remaining half at 377p ('Bargain shares second chance', 17 August 2017). The 377p price quoted in the table is the final exit price.|
|4. Simon Thompson advised banking profits on half your holdings in Bowleven at 33.75p (‘Hitting pay dirt', 9 Apr 2018). The company subsequently paid out a special dividend of 15p a share on 8 February 2019 and the balance of the holding was sold at 5.5p ('Taking stock and profits', 9 December 2019).|
|5. Simon Thompson advised to sell Management Consulting's shares at 6p in February 2018 (‘How the 2017 Bargain share portfolio fared’, 2 February 2018). The price quoted in the table is the 6p exit price.|
|6. Tiso Blackstar has transferred its UK listing to the Johannesburg Stock Exchange. Price quoted is sterling equivalent bid price at current exchange rates.|
|7. Simon Thompson advised banking profits on half your holdings in BATM shares at 49.9p ('Bargain Shares: Exploiting pricing anomalies and top-slicing', 3 December 2018) and subsequently bought back the shares at 43.5p ('BATM armed for a re-rating', 11 July 2019).|
|Source: London Stock Exchange share prices.|
Bango’s partnerships gain momentum
■ Microsoft partnership expanded for bundling Xbox subscriptions.
■ Partnership with BT to deliver a range of third-party products and services.
Aim-traded Bango (BGO:177p), a provider of a state-of-the-art mobile payment platform enabling smartphone users to charge purchases made in app stores straight to their mobile phone account, has announced a raft of important deals this month.
The company’s partnership with US tech giant Microsoft has been expanded to open-up access to Xbox subscriptions and consoles sales in time for the year end buying season. Bango already powers direct carrier billed payments for Xbox gamers and across the Microsoft Store, but this marks an important move into hardware subscriptions and opens the market to potentially millions of gamers who previously were unwilling to buy a console. Microsoft will now leverage the Bango payment platform to enable telco partners to bundle Xbox Game Pass Ultimate and Xbox All Access in their subscription packages. It also highlights how Bango is exploiting the growing trend amongst consumers seeking cloud gaming subscription services for gaming content.
Bango has also tied up with BT to use the Bango platform to deliver a range of third-party products and services, thus enhancing the content ecosystem available to BT customers and enabling them to enjoy greater flexibility in the range and way they consume content. The first launch for BT is with BritBox, a digital video subscription service created by the BBC and ITV. Eligible customers can select a six-month complimentary subscription to the full BritBox digital video service and then add the subscription to their BT plan when the promotion ends. Importantly, Bango’s technology provides powerful data insights to ensure the most attractive offers are presented to each selected customer segment, all through one common platform.
Admittedly, it’s been a roller coaster ride since I first suggested buying the shares at 93p ('Bang on the money', 26 September 2016), but they are making headway since my last buy call at 168p (‘Small-cap value buys’, 15 September 2020) and a break out through last summer’s 194p high seems a real possibility as contract momentum builds. The 225p target price I outlined in my last article could prove conservative. Buy.
SRT’s bumper contract pipeline points to highly profitable growth
■ Major contracts in validated pipeline expected to be signed in near future.
■ Work restarts on flagship Philippines project.
Aim-traded SRT Marine Systems (SRT:37p), a global leader in AIS, an advanced identification communications technology used to track and monitor maritime vessels, has reported a first half operating loss of £2.4m as Covid-19 restrictions held back work on its large systems business. This was expected.
More importantly, SRT has now restarted work on its £32m flagship Philippines project that involves the installation of monitoring systems, coast stations, vessel transceivers and satellite data feeds. The company’s gross cash of US$5m easily covers the working capital needs to fulfil this contract ahead of the receipt of milestone payments. When fully commissioned next year, it will be the most sophisticated national fisheries monitoring and management system in the world. There should be follow on contract opportunities, too, as the monitoring system expands from the existing 5,000 vessel target to the 200,000 strong Philippine fishing fleet.
It’s worth noting the comments of chairman Kevin Finn and chief executive Simon Tucker in relation to three major contract awards with customers in The Middle East, worth £62m in revenue over a two-year implementation period. Having been delayed due to Covid-19 lockdowns, Mr Finn says the final procurement and contracting process is nearing completion on up to US$100m of contracts in SRT’s US$550m validated pipeline across 17 projects. Mr Tucker expects to “report significant progress in the near future.”
The longer-term outlook remains promising, too, given that the global political landscape is becoming increasingly uncertain, while security threats become ever more diverse and frequent. This can only drive demand for SRT’s marine domain awareness technology which also has applications in national security, border control and search and rescue. Indeed, a country’s coastline is often its most vulnerable border, and one that needs protecting in light of growing migrant and immigration concerns and the fact that waterways are a significant source of economic activity.
Admittedly, the absence of earnings estimates in the market leaves investors in the dark, but my financial models suggest that SRT should be able to generate annual revenue of £50m and pre-tax profit above £10m once the aforementioned contracts are signed. This projection not only reflects the high gross margin (40 per cent) on system projects, but also the operational gearing of the business once annual fixed overheads of £7m are covered.
SRT’s shares hit my 55p target in early January to deliver a 51 per cent return after I initiated coverage around the current price (‘Set sail for a profitable voyage’, 16 August 2019) and I subsequently advised buying in again at, 25.5p (‘Stockpicking for bear market gains’, 16 April 2020). I now feel that imminent news flow on SRT’s major contracts should drive a further re-rating of shares in the £60m market capitalisation company. On a bid-offer spread of 35.5p to 37p, they rate a buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].
November Promotion: Subject to stock availability, the books can be purchased for the promotional price of £12.50 each plus postage and packaging, or £25 for both books with free postage and packaging.
They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.
Simon Thompson was named 2019 Small Cap Journalist of the year at the 2019 Small Cap Awards.