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Leverage a high-growth, low-rated tech game

  • Trading ahead of analysts’ annual pre-tax profit forecast of £2m, up from £1.1m in 2020/21
  • Net cash of £25m (150p per share), compared to £22.6m at 30 September 2021
  • Strong forward order book extending beyond 12 months

Maldon-based semiconductor chip designer and manufacturer CML Microsystems (CML:380p) is reaping the rewards of powerful age-old drivers in its end markets. Following the strategic divestment of its solid-state storage division, CML is a pure-player in the fast-growing industrial communications market. Specifically, it supplies ICs to distributors and system integrators (Cobra, Hytera, Icom, Kenwood, Orbcomm and Sepura are all customers).

CML not only leverages its position as a key supplier to many Tier 1 equipment manufacturers globally, but is also well funded to accelerate growth in a market that exhibits secular growth megatrends. The main drivers are the growing demand for data to be transmitted faster and more securely, the upgrading of telecommunications infrastructure and the growing prevalence of private commercial wireless networks for Internet-related voice and data communications. industrial objects (IIoT). In data-centric markets, higher data throughput from terrestrial and satellite communications applications is required to meet the needs of growing machine-to-machine (M2M) and IIoT market segments.

CML’s addressable market is worth $1 billion (£768 billion) and includes a number of key growth areas in the coming years: critical infrastructure (utilities, smart grid, RF identification (RFID)); 5G (repeaters, small/picocells, fixed wireless access, distributed antenna systems, smart meters); and satellite communications (terminals, broadband access).

To address these multiple growing markets, CML has expanded its semiconductor product portfolio by adding narrowband applications operating at the lower end of the radio spectrum. Unlike broadband, these applications use fixed-location, short-range wireless applications such as RFID, remote keyless entry devices for commercial vehicles, or narrowband IoT focused on indoor coverage, low cost, long battery life and high connection density. The acquisition of a third-party design house, PRFI, was instrumental in expanding product offerings and addressable markets.

PRFI is an approved third-party design company for several major global semiconductor companies and has an impressive list of customers that includes BAE Systems, Huawei, Inmarsat, National Semiconductor, QinetiQ, Samsung, Sony Semiconductor and Thales. PRFI was acquired not only for its expertise in microwave and millimeter frequencies, including broadband applications for high throughput applications, but also to accelerate the time to market of new products. It is doing just that by launching a new SµRF family of high-frequency, high-bandwidth ICs targeting RF and mmWave frequencies in emerging markets such as 5G, satellite and IoT. The first orders have already been received from users new to vehicle tracking and smart grid applications.

Importantly, CML’s diverse, blue-chip customer base includes some of the world’s leading commercial and industrial product manufacturers, and its customer spread and product line diversity helps protect the company from cyclicality generally associated with the semiconductor industry. Additionally, CML’s proprietary intellectual property, reputation for quality and reliability, and single-source status mean that once its chips are engineered into a customer’s product, it rarely loses a contract given the significant product redesign required for the client to operate elsewhere.

Additionally, CML works closely with its customers throughout the product development cycle to reduce time to market and reduce future sales cycle risk. In effect, this “one stop shop” offering is an extension of the customer’s own engineering team. CML uses a combination of outsourced manufacturing and in-house testing, employing 147 people, 40% of whom are engineers, in operations in the UK, Asia and the US.

Currently, a high proportion of sales come from professional mobile radios (the network of choice for police, ambulance services, military and other critical infrastructure markets) and data-centric wireless applications ( critical infrastructure, public services, smart grid). 5G infrastructures (base stations, small cells, distributed antenna systems) and satellite communications represent a smaller part of the mix, but their contribution is expected to increase in the coming years.

Age-old growth engines are driving revenues and profits higher. CML outperformed full-year profit estimates previously updated by property broker Shore Capital and is well positioned to boost pre-tax profit by 25% to £2.5m on 11-year rise in revenue. % of £17.6 million in the new financial year. On this basis, the shares are rated on an attractive cash-adjusted forward price-earnings (PE) ratio of 15 and offer a forward-looking dividend yield of 2.8%. A recently announced £3m share buyback program is another bright spot.

CML also has hidden value on its balance sheet, owning valuable unencumbered investment properties near Chelmsford as well as the former Microsense facility in Portsmouth which is leased to a third party. These properties were last valued at £3.78million, a valuation well supported by rental income of £0.34million. In addition, the unencumbered property and 29 acres of excess land at the Maldon headquarters has a book value of £4.5million, less than half of its estimated open market value.

I launched the cover, at 400p, earlier this year (Alpha Report: “Take advantage of semiconductor megatrends”, February 4, 2022), and see the potential for nearly 50% of the stock price up from my target price of 550p. To buy.

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