- Flat interim pre-tax profit of £1.9mn
- Full-year guidance maintained
First-half results from chip designer and manufacturer CML Microsystems (CML: 360p) are far better than the headline numbers suggest.
That’s because the group incurred £0.3mn of costs in relation to the $13.2mn (£10.5mn) post-period-end acquisition of Silicon-Valley-based semiconductor company Microwave Technology. The company is a recognised leader in the design, manufacturing and marketing of GaAs and GaN-based monolithic microwave integrated circuits (MMICs), discrete devices and hybrid amplifier products for commercial wireless communication, defence, space and medical MRI applications.
Excluding these costs, operating profit would have increased from £1.75mn to £1.9mn on 5 per cent higher revenue of £10.6mn. At constant currencies, revenue growth was closer to 9 per cent. That’s an impressive result given the more challenging macroeconomic backdrop and represents outperformance of the global semiconductor market, which reported declining sales in the second and third quarters this year.
This highlights the resilience of CML’s end markets, where the focus is on industrial and critical communications applications in contrast to the memory, personal computer and consumer markets, which tend to exhibit more volatility. The group’s key markets include mission-critical communications, wireless networks and satellite, Industrial Internet of Things and broadcast radio. Furthermore, the Microwave Technology acquisition expands and complements CML’s growing product portfolio in high-growth market segments.
CML is also making strong headway with its low-power radio receiver solution for DRM, a digital radio standard that is being widely adopted in Asian countries. It is 60 per cent cheaper and uses 80 per cent less power than DRM modules in the market and has recently been adopted by a leading digital radio maker for its products.
Importantly, the directors expect full-year revenue to be slightly higher than market expectations, prompting house broker Shore Capital to edge up its estimate to £23.3mn, implying 13 per cent year-on-year growth. On this basis, pre-tax profit should rise by 22 per cent to £4.4mn, but expect flat earnings per share (EPS) of 22.2p due to a higher tax charge.
Adjusting for the initial cash payment on the Microwave Technology acquisition, net cash of £18.3mn (114p) is forecast at the financial year-end, but it could be higher if a surplus £2mn freehold commercial property in Fareham, Hampshire and 15 acres of excess land at its Maldon head office are sold.
Admittedly, CML’s share price is well down on the 490p entry point in my 2023 Bargain Shares Portfolio, but this is a reflection of the ‘risk-off’ environment in UK small-cap equity markets rather than company-specific concerns. In a more benign environment, the shares should recover strongly. CML’s enterprise valuation equates to only 10 times post-tax profit estimates even though the company is set to deliver the profit growth analysts were expecting at the start of the year. Buy.
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