A lowly rated technology group offering a prospective 5.5% yield

Israel-based technology group MTI Wireless Edge (MWE:48p) delivered a robust set of annual results despite facing currency headwinds, exiting its Russian electronic distribution activities – which had previously contributed around $0.2mn of annual operating profit – and dealing with well-documented semiconductor supply chain issues.

The $1.2mn (£1mn) acquisition of a 51 per cent stake in PSK, an Israeli developer, manufacturer and integrator of communication systems and monitoring systems for the country’s defence market, proved a masterstroke. Having successfully integrated the business after acquiring it in January 2022, PSK subsequently landed a $10mn contract with the Israeli Ministry of Defence, its contribution more than offsetting the loss of earnings from MTI’s Russian operations, which were sold in March 2022.

Strategically, PSK is enabling MTI’s Summit electronics unit to step up the value chain in the Israeli defence market by offering components to 40 international suppliers of radio frequency/microwave components as well as turnkey solutions (fixed and mobile communication, telemetry and signal intelligence systems). MTI’s Summit division increased annual revenue by 15 per cent to $16.6mn to deliver 25 per cent higher operating profit of $2.3mn, or half the group total.

Moreover, chief executive Moni Borovitz says that PSK has several significant tenders coming up this year, adding that the Summit electronics unit has completed a number of design wins, especially military solutions, for both existing and new customers. Analysts at joint house broker Shore Capital have taken note, pencilling in divisional operating profit of $2.42mn on revenue of $17.3mn in 2023, adding that their 5 per cent revenue growth assumption is conservative.

MTI has a $1.43mn contingent liability on its balance sheet relating to the PSK purchase, including a deferred earn-out and the cost of buying out the remaining 49 per cent. PSK earned an operating profit margin of 10 per cent on revenue of $4mn last year, so it’s already a bargain buy.

Switching on antenna growth

MTI’s smaller antenna division has contract momentum, too. Last autumn, the unit won two contracts worth $1.25mn, including a 5G backhaul award in India, and has a “big pipeline of contract opportunities”, says Borovitz. Nato countries raising their defence budgets is highly supportive of demand for military antennas.

In the commercial market, the group is investing in innovative new technologies, notably the ongoing development of a new automatic beam steering (ABS) antenna solution for the 5G backhaul market. The technology counters small antenna mast movements that distort the signal, caused by wind and changes in temperature, an industry-wide challenge. Borovitz highlights significant interest from three tier-one customers and several tier-two customers, so is well-positioned to win contracts and deliver a material contribution to divisional revenue next year.

Having delivered 20 per cent higher operating profit of $0.33mn on revenue of $11.6mn in 2022, Shore Capital expect the antenna business to double its profit contribution this year on 10 per cent higher revenue. The accelerated profit growth mainly reflects operational leverage as a higher proportion of incremental gross profit earned in a positive sales cycle is converted to operating profit.

A climate change winner

MTI is also a play on water scarcity, offering the agricultural industry, municipal authorities and commercial organisations the group’s Mottech's real-time irrigation monitoring, control and reporting software, a smart way to manage water consumption efficiently.

Admittedly, divisional operating profit fell 11 per cent to $1.84mn on 3 per cent higher revenue of $18.2mn in 2022. However, expect a return to profit growth this year – Shore Capital forecasts $0.1mn higher operating profit on $18.7mn of revenue – as the benefit of price increases enhances the profitability of the business.

Also, Mottech has expanded its service and product offering, winning a $0.5mn municipal contract in Israel to monitor and partially control more than 30 city fountains that had previously been operated individually. There is an opportunity to expand the deployment of the solution across multiple municipalities as well as increase adoption of another solution that measures the water available at the roots of plants to enable greater irrigation precision.

Modest valuation

Shore Capital expects 2023 pre-tax profit to rise 12 per cent to $4.8mn on 5 per cent higher revenue of $48.8mn, sensible assumptions that reflect the divisional growth projections. Although a higher tax charge means earnings per share (EPS) are forecast to be flat at 4.2¢ (3.5p), the cash-generative group should be able to grow net cash by 13 per cent to $9.2mn (8.8p a share), enabling the board to maintain its progressive dividend policy, having raised the 2022 payout per share from 2.8¢ to 3¢ (2.5p).

MTI’s shares have marked time since the third quarter results (‘On the technology beat’, 21 November 2022), but on a cash-adjusted price/earnings (PE) ratio of 11 and underpinned by a prospective dividend yield of 5.5 per cent, this is an attractive entry point. Buy.

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