COP26 has again highlighted the damage carbon emissions are having on the planet and the urgent need for all countries to adopt friendlier environmental solutions.
For example, global warming is accentuating the need to source more accurate and cost-effective irrigation systems which reduce water and power usage, a factor that is underpinning strong demand for wireless water management systems. Israeli-based technology group MTI Wireless Edge (MWE:76p) offers one way of playing this theme as the group’s systems are proving incredibly popular in French vineyards (140,000 controllers installed in less than two years), and in major cities, particularly across Australia, China and Canada.
Chief executive Moni Borovitz highlights ongoing growth in recurring revenue from an activity which accounted for more than 40 per cent of group turnover and operating profit in the first nine months of this year. True, divisional margin dipped slightly mainly due to higher shipping costs and unfavourable currency fluctuations, but the hit to margin is now reversing.
It’s not the only reason why MTI is on course to lift annual pre-tax profit by a fifth to $4.9m (£3.6m) on 6 per cent higher revenue of $43.4m to deliver earnings per share (EPS) of 3.23p, up from 2.77p in 2020.
Tapping into smart technology
- Operating profit rises 11 per cent to $3.3m on 8 per cent higher revenue of $32m in first nine months of 2021
- All three divisions post revenue growth
- 5G antenna revenue up 30 per cent year on year
Another key take for me is the ongoing growth in MTI’s antenna business which is feeding off commercial sector demand for higher-margin radio-frequency identification (RFID) and 5G network backhaul antenna systems.
The division’s operating profit surged 35-fold to $179,000 on 7.7 per cent higher revenue of $2.8m in the third quarter, which means operating profit of $425,000 in the first nine months of 2021 is up seven-fold year on year on slightly higher revenue of $8.6m. This highlights the much higher-margin contribution from both RFID and 5G activities.
MTI has recently won blanket orders worth US$0.85m from two key customers for 5G backhaul antennas, and Borowitz notes the majority of the telecoms industry’s investment in 5G is yet to come. As a key supplier to the major mobile network radio suppliers, he views the sales opportunity as significant. Borowitz also revealed during our results call that MTI has registered a patent for a new smart 5G antenna that is creating interest among the large telecom groups. In addition, MTI has signed up five new customers for its military antenna business which “opens the doors for systems houses, a good sign for future orders”.
MTI’s Summit electronics division, which represents 40 international suppliers of radio frequency/microwave components, has grown revenue by 16 per cent to $10.5m this year, buoyed by high levels of government spending on defence. The unit accounts for 40 per cent of group operating profit. Importantly, MTI has signed a three-year strategic agreement with a large, long-term customer operating in the defence sector. The arrangement will speed up interactions between the two companies, make transactions more efficient, and help grow sales. The customer currently places orders for $4m of components, so is significant.
MTI’s share price is unchanged since the half-year results (‘Tapping into climate change and 5G growth, 16 August 2021), albeit it is still 90 per cent higher than when I initiated coverage Alpha Report: ‘Tapping into 5G and climate change technologies’, 4 Sep 2020). This means that with another double-digit increase in EPS to 3.59p forecast in 2022, and cash building strongly – Allenby Capital pencils in a 2021 net cash pile of $10.4m rising to $12.2m (10.3p a share) in 12 months time – the shares are rated on 18 times cash-adjusted forward earnings, a modest rating for a technology company. A prospective dividend yield of 2.7 per cent and potential for MTI to make earnings-accretive acquisitions are supportive of my 100p target, too. 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].
Promotion: Subject to stock availability, the books can be purchased for the promotional price of £10 each plus £3.25 postage and packaging, or £20 for both books plus £3.95 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.