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A smart play on defence spend, climate change and 5G

A technology group is winning new contracts and operates in market segments displaying attractive structural growth: demand for 5G networks; global warming and climate change; and defence budget spending.
August 15, 2022
  • Flat interim pre-tax profit of $2.04mn on six per cent higher revenue of $22.7mn after accounting for acquisition costs, exit from Russia and higher non-cash charges
  • $10mn contract award in Israel since half-year end
  • Strong order book
  • Analysts maintain full-year double-digit profit growth forecasts

Israeli-based technology group MTI Wireless Edge (MWE:57p) is reaping an immediate payback from January’s $1.2mn (£1mn) acquisition of a 51 per cent stake in PSK, an Israeli company which develops, manufactures and integrates communication systems and advanced monitoring systems for the Israeli government defence market.

In the first half of 2022, PSK contributed $2mn of revenue on a 5 per cent operating margin and MTI also earns management fees. Moreover, since the half-year end, PSK has landed the largest contract in its history, a $10mn award over seven years from the Israeli Ministry of Defence. Strategically, PSK is enabling MTI’s Summit electronics division, which represents 40 international suppliers of radio frequency/microwave components, to step up the value chain by offering not only components, but turn-key solutions such as fixed and mobile communication, telemetry and signal intelligence systems, too.

The division posted 25 per cent higher operating profit of $1.1mn on revenue up a fifth to $8.4mn. It looks well set to continue delivering strong growth especially as the conflict in Ukraine has had a knock-on effect on military and defence spending by western governments.

The group’s antenna business has strong growth prospects, too, albeit the global microchip shortage has impacted clients and led to delays in fulfilling orders. The unit returned to profit in the second quarter, but first half operating profit of $0.1mn was still down from $0.25mn in the same period last year on flat revenue of $5.7mn. However, there is evidence of an easing of chip supply issues and MTI’s backhaul solutions should deliver significant growth as the roll-out of 5G infrastructure gathers pace. India recently completed its 5G auction and MTI has seen a flurry of customer enquiries for the group’s manufacturing capabilities. MTI is working with five of the seven leading OEMs in the sector, so is well placed to benefit.

The group offers exposure to climate change, too. MTI’s cutting-edge Mottech's real-time irrigation monitoring, control and reporting software offers the agricultural industry, municipal authorities and commercial organisations a smart way to manage water consumption efficiently. At the end of the first half, the group landed €1mn (£0.85mn) of new contracts in Italy for delivery in the current quarter. Water scarcity is becoming a major issue across the globe as more countries face up to food shortages due to soaring temperatures impacting crop yields. Interestingly, Mottech has been able to push through some above inflation price rises, says group chief executive Moni Borovitz, so there is scope for improved margins, too. Although divisional operating profit was flat at $0.86mn on a margin of 10 per cent, Borovitz notes the unit has some big opportunities in the pipeline in Western Europe.

In the six-month period, group pre-tax profit was flat at $2.04mn on six per cent higher revenue of $22.7mn, but this was a strong result given that the exit from Russia (contributed $0.9mn of revenue and a meaningful profit in the first half of 2021), PSK’s acquisition costs ($0.1mn) and a $0.28mn increase in depreciation and amortisation charges held back the reported result. First half cash profit, which increased 11 per cent to $2.9mn, is perhaps a better measure of the underlying performance.

Joint house broker Shore Capital expects full-year pre-tax profit to rise 10 per cent to $4.4mn on six per cent higher revenue of $45.2mn based on cash profit increasing from $5.4mn to $5.7mn, sensible assumptions in my view. Admittedly, a higher tax charge means earnings per share (EPS) are forecast to be flat at 4.1c (3.4p), but the cash generative company should still end the year with net cash just shy of $11mn (10p a share), enabling it to maintain a progressive dividend policy.

On this basis, the shares are priced on a cash-adjusted price/earnings (PE) ratio of 13.8 and offer a 4.3 per cent prospective dividend yield, modest ratings for a technology group operating in market segments that are displaying attractive structural growth: demand for next generation 5G networks; dealing with global warming and climate change; and increased defence budget spending. The board adopts a progressive dividend policy, too, having paid out 5.3c (4.3p) a share since I initiated coverage on the shares, at 40p (‘Alpha Research: Tapping into 5G climate change technologies’, 5 September 2020).

So, with analysts expecting MTI to deliver double-digit annual pre-tax profit growth over their three-year forecast period, and the latest order book significantly higher year-on-year, I see scope for the share price to make progress back to the 65p level of my last buy call (‘Farming winners from climate change and geopolitical tensions’, 23 May 2022), and well beyond. Buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

■ 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 at £16.95 each plus postage and packaging. Details of the content can be viewed on www.ypdbooks.com.

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