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AIM DEBUTANT CALNEX, MAY BE WORTH WATCHING - 06/10/20

Although now may not appear to be the best of times for a company to come to the market, Calnex Solutions which made its market debut yesterday morning may be worthy of a closer a look, or as I have elected to do, take an interest. It is very much embedded across the telecommunications industry which has been largely unscathed by the issues of Covid and here it works for and with instantly recognisable names, such as China Mobile, Erikson, Nokia, Samsung and Verizon to name but a few. The company's business is very much focused on providing and delivering specialist testing equipment for its many customers own products and equipment across the telecom space providing for assistance in optimising the functionality and performance of all aspects of their wares.. To date, Calnex has generated business in close to 70 countries across the world which has seen over 600 customers using its products and services, suggesting plenty of diversity and importantly  no reliance on one or two customers. Indeed, despite having some punchy names as clients, 50% of total revenue is currently derived from as many as 10 different end users, which given much is long term and repeat business provides for a level of comfort and visibility. Yesterdays IPO has seen the company raise, via an oversubscribed placing £22.5m which after payment to selling shareholders and a reduction in some debt sees Calnex retaining £6m which will in part be used for strategic acquisitions. Some well known and highly regarded Institutional holders have come on board which perhaps bodes well and the shareholder list will see the likes of BGF sitting on 15% of the company, whilst founder Tommy Cook retains a notable 21%. Founded in 2006 at Linlithgow Scotland, the company appears to have scaled up pretty quickly and with the increasing acceleration and fast moving environment in the telecom space, particularly with the advent of 5G, it looks well placed for further sustainable growth.   The market cap today at £42m and 50p per share looks potentially attractive as the company has an established and proven track record across the test and measurement space that also now encompasses large data centre operators,  a sector that  looks equally destined for significant ongoing growth. Importantly, the company appears to have a strong financial track record with historical CAGR revenue over the last five years of 16%, whilst as it joins AIM, it also boasts a record order backlog moving into full year 2021 along with a strong sales pipeline. A key point in eyeing up the prospects here is the impressive level of repeat revenue which is always a positive factor and in its case, this has over the last three years been running at more than 80% of the total. With the Telecom industry not only enjoying strong demand as a result of some of the issues that have emerged as a result of the pandemic, changes that had already been on the cards such as 5G and a constant migration to the cloud are now accelerating which sees Calnex seemingly in a decent spot as demand increases and suppliers look to bring new products and services to the market. The company already has within it an extensive range of solutions and  testing products for the requirements for the 5G space and says it is well placed to deliver and meet its customers future needs.   Revenue for the last year jumped to £13.7m against the previous £10.3m which saw pre-tax profits at £1.7m.  Although that latter figure was a reduction on the prior £2.4m figure, this was due to increased spend on R&D and admin costs. R&D is likely to remain a key feauture of the business, but with the solid prospects of winning new business, Calnex could prove to be not only be an attractive growth play, but one that can deliver progressive profits going forward. The company has also along the way made some interesting bolt-on acquisitions, including an operation in Belfast titled JAR and Luceo Technologies of Berlin, the latter of which supplies products that are used extensively across a wide variety of telecommunications applications including fibre channel and optical component testing. Further bolt-on-buys look to be on the cards and anything that emerges in the coming months along with further contract news, then the shares could quickly attract attention. Broker Cenkos should be issuing a note early next month whilst I am also hopeful of speaking with the CEO.

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