CALNEX REMAINS WELL PLACED - 25/05/23

Calnex Solutions has been a highly successful investment for me to date, having bought in soon after the IPO back in the Autumn of 2020, the shares then being circa 54p to buy.

The company, with an already proven track record as a private entity appeared to be one of those AIM rarity’s on coming to the market, in that it was seemingly very reasonably priced.

That proved to be correct as since then, the shares have until recently performed extremely well, hitting a high of £1.94p earlier this year, before retracing and subsequently dropping further southwards to the £1.00p level after unfortunately warning the market on next year's numbers.

With such situations it is easy to conclude that the growth story is perhaps over or indeed set-back for a considerable period, which in many cases often rings true.

Calnex however remains extremely well placed to return on the growth path in the not so distant future, where given the nature of its business and geographical spread, significant opportunities remain, despite what appears to be a short-term hiatus.

The company, which I have covered here a few times following my previous speaking with management, is in a position where its offerings are very much needed, in the test and measurement space of critical devices and networks.

This sees it designing and producing high-end test instrumentation and solutions for network synchronisation, network emulation and critical network time distribution.

Test solutions are supplied to Telecom Network Operators, Network Providers, Systems Suppliers, Labs and Hyperscale Data Centre operators.

To add a further feel as to why Calnex is in a decent spot it is worth noting that Network emulation alone is a key process that is undertaken by Calnex customers in order to achieve maximum operational efficiency and performance.

Here, a software programmed product or device can replicate or mimic at the highest level the various interactions across systems in order to quantify performance ahead of the likes of any roll out or mass production.  

In terms of Data Centers, which is a more recent market for Calnex this is a less mature but nevertheless developing sector compared to the Telco space and could provide significant opportunities ahead for the company.

Calnex is also itm ust be noted a global player where it is active in close to 70 countries across the world where it plays an integral part in the product development lifecycle of a new device or system.

With numerous end customers Calnex enjoys long standing relationships where its top ten customers are typically on board for at least ten years.

Having just delivered its full year 2023 results which were highly impressive, I was once more able to catch up with CEO and founder Tommy Cook, along with CFO Ashleigh Greenan.

The numbers for last year saw a revenue jump of 24.5% to £27.4m with underlying EBITDA increasing by 25% to £8m whilst pre-tax profits demonstrated a 20.7% increase to £7.2m.

The closing cash position and cash held on term deposits stood at an impressive £19.1m as the company announced the intention of paying a final dividend to bring the total for the year to 0.93p.

EPS came out at 6.8p against last year’s 5.2p which at the current price of £1.08p has the stock trading on a PE of just under 16.

Looking at the current financial year though, following Calnex’s warning on the numbers, broker Cenkos has forecast EPS of 3.6p a big reduction which shows the stock trading on a much more punchy forward PE of 30.

Given the nature of the business and its long-term prospects investors are clearly and rightly in my view looking beyond the near- term disruption where customers are presently holding back on spending amidst their looking at and assessing budgets.

Although some may be turned off by the step back on numbers for the current year, the space Calnex serves and the end customer base is really only going to expand and continue to grow.

And despite the frustration of a slowdown in orders for this year the company has continued to engage positively with customers, leading me to conclude that it is going to be a relative pause, as opposed to anything more protracted.

Speaking with CEO Cook in relation to the results just delivered, he sounds a positive note describing them as being a really good set of numbers in terms of both profit and growth.

Internally, Calnex had, he said, been growing quite considerably with a lot of change going on and where the integration of the acquisition of iTrinegy based in Stevanage had gone well and is on track.

“We have had a great year” Cook adds, “and the slow-down was really unexpected, but then, it behaves the way it behaves".

The CEO sounds as frustrated as any investor, but despite that remains relaxed and confident in the belief that the tide will turn and given his time at Calnex from inception has no doubt experienced a few bumps in the road along the way.

He adds that Calnex has new products now and coming through and retains strong relationships that it continues to build and when the shackles do come off, he says that they will be ready.

In terms of the markets in which it operates, Cook emphasises that whilst the Telecom sector is very mature and the ecosystem is stable, data centres as I touched on earlier are still in a very early phase.

This, he points out, sees operators deliberating over various decisions, where it can be a case of all or nothing at present.

That said, Cook also stresses that Calnex has the new products that will help and which are also likely to see a higher value, as the Data Centre area brings both new opportunities along with challenges.

Speaking on the iTrinegy acquisition, the CEO says that it is all going to plan with the first year all about integration and this year setting it up for growth. They have already doubled the headcount there and put in place more on the R&D front.

“We have looked at sales routes to market and recently got new partners in place and this year will give us a better feel of what we can really achieve with it” the CEO adds.

In contrast to the Telco space, the area of Defence Cook says has been performing really strongly and Calnex has been seeing a few opportunities, so that sector is a focus for them this year along with one or two other areas.

Further acquisitions are also very much a possibility, where with a robust balance sheet, no debt and a strong cash balance something small and complementary could certainly be added from its own resources.

CFO Greenan does add that should the company embark on a larger acquisition, then its own cash resources would be matched with some other form of funding.

Dividends are also on the agenda and the CFO says that when they came to market there was a strategy in place for a progressive dividend policy moving forward.

Although they don’t currently put out any metrics for that, Greenan quantifies the position by stating that it’s a gradual progression, where she also adds that building the cash has also been important within their overall strategy.

Cook also comments that they have been looking at a couple of potential prospects and they are very focused, being aware of the benefits and potential hurdles in bringing something larger on board.

Clearly, the team at Calnex recognise the growth opportunities that exist and appear intent on driving and maximising the growth potential.

Returning to the market climate we touch upon China where Cook says that it has been somewhat disappointing as it has been a couple of years now that they have been predicting that it would be opening up.

Part of the problem it seems, is that China has been relying on specific technology that it sources from Western based or US Countries that they haven’t been able to bring in and he sees that situation continuing for at least another year.

In terms of the market forecasts, the CEO sounds comfortable enough with the numbers, where he says that in recent months things appear to have stabilised and not got worse, so he views it as a case of just getting through, as they also bring the new products to market.

Broker Cenkos has pencilled in full year 2024 revenues of £24m with a pre-tax profit of £4m where the forecast dividend is expected to come out at 1.01p.

Obviously the speed of the downturn that hit not only Calnex but other industry players such as its partner Spirent surprised not only investors but the company too, which understandably hit sentiment and knocked the premium rating it had built up.

Still, it does look like a matter of timing before normal service is resumed and the shares look a solid hold to me at or around current levels ahead of a recovery which could accelerate as sharply as the pull back.

Additionally, another acquisition or two also look to be a matter of when not if, although one would expect that Cook and Greenan will want to get the ducks lined up in a row before committing.