Why investors shouldn't bail on CML Microsystems

Maldon-based semiconductor chip designer and manufacturer CML Microsystems (CML:306p) has missed profit guidance for the 2023-24 financial year, prompting an 18 per cent slide in its share price.

The main issue is that some customers and channel partners have been reducing inventory levels, a trend that the directors expect to continue into the second half of 2024.

That said, as a sole source supplier, customers are reliant on CML’s products to drive their success, so expect a return to core product growth once the current inventory hangover normalises. In addition, although CML is benefiting from a contribution from the recent acquisition of Microwave Technology, which is reassuringly trading above expectations, that company’s products are lower margin which impacts the group margin.

So, although annual revenue of £23mn is likely to be 11 per cent higher than the year before and only £0.3mn shy of market estimates, the directors revised full-year cash profit guidance of £6.4mn falls short of house broker Shore Capital’s £6.8mn forecast. Moreover, after factoring in costs associated with the acquisition, pre-tax profit is forecast to be slightly under £3mn in the 12 months to 31 March 2024. On an adjusted basis, Shore anticipates full-year pre-tax profit edging up to £3.7mn, or £0.7mn shy of forecasts at the time of the interim results in December 2023.

On this basis, the shares are rated on 16 times earnings per share (EPS) estimates of 18.7p and offer a 3.9 per cent dividend yield assuming the pay-out is raised from 11p to 11.9p, as analysts predict. Closing net cash of just under £18mn (111p) equates to more than a third of CML’s market capitalisation of £50.7mn, implying the shares trade on a modest cash-adjusted price/earnings (PE) ratio of 10.

So, although CML’s share price has fallen from the 415p level when I updated my 2023 Bargain Shares Portfolio six weeks ago, I would not bail out at such a depressed level. Hold.