- Cash profit up 57 per cent to £4.3mn on 29 per cent higher annual revenue of £17mn, beating analyst profit estimates by 11 per cent
- New product launches gaining sales traction
- Confident outlook for 2022/23 financial year
- Potential sale of surplus land to release windfall gains
- Net cash of £25mn (157p) accounts for 43 per cent of market capitalisation
Maldon-based semiconductor chip maker and designer CML Microsystems (CML:365p) has smashed analysts' full-year earnings forecasts, a performance driven by the recovery in established voice and data-centric markets and secular drivers, too.
CML is a pure-play on the high-growth industrial communications market, providing integrated circuits to distributors and system integrators. The directors’ vision is to be the first-choice semiconductor partner to technology innovators, and exploit the exponential growth opportunity in data-consumption through expansion of CML’s addressable market into mega trends (industrial internet of things (IIoT), 5G and Industry 4.0).
For example, to deal with the future needs of 5G networks that operate on millimetre wave radio frequencies, CML has provided customers with a suitable Power Amplifier solution that addresses exacting technical specifications, and with improved efficiency and lower heat generation. The higher frequencies that future 5G products will utilise offer higher data rates, greater capacity, better quality and lower latency.
The majority of sales are currently generated from Professional Mobile Radios (the network of choice for the police, ambulance service, military and other critical infrastructure markets), and data-centric wireless applications (critical infrastructure, public utilities, smart grid), but revenue from 5G infrastructure and satellite communications is expected to scale up significantly in the next few years. New product launches are gaining traction, too, as CML has been awarded contracts by two major customers in the areas of advanced metering and vehicle tracking.
A rock-solid balance sheet is another positive as CML’s net cash of £25mn should get a boost from the potential sale of an investment property in Fareham, and 19 acres of surplus land at the company's Maldon headquarters. Subject to succesfull planning consent, CML already has buyers lined up to acquire the land. House broker Shore Capital believes that the £12mn fair valuation of CML's land and property “could be significantly higher with appropriate planning consent”.
Shore expects adjusted pre-tax profit, earnings per share (EPS) and the dividend to all increase by a fifth to £2.5mn, 15.5p and 10.8p, respectively, in the 12 months to 31 March 2023, implying the shares are rated on a cash-adjusted forward price/earnings (PE) ratio of 13 and offer a prospective dividend yield of 3 per cent. The forward earnings multiple could drop sharply in the event of material property and land sales, and provide the board with additional firepower to make bolt-on acquisitions, or distribute more special dividends.
I initiated coverage at 400p (Alpha Report: ‘Profit from semiconductor megatrends’, 4 February 2022), reiterated that advice ahead of the results (‘Tap into a lowly rated high growth technology play’, 13 April 2022), and maintain my 550p fair valuation. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
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