Shares in AIM test and measurement newcomer Calnex Solutions have thus far remained not far off its IPO price of earlier this month, which is perhaps no bad thing for those looking to buy in, or even as I have elected to do, add to an existing position.
At a current 52.5p the shares look potentially very attractive for both near and longer term growth and returns, not least, as the company already has an established track record on both revenue and profitability whilst operating in a hot space.
In order to glean a little more on the business and its prospects I have been fortunate enough to speak with CEO and founder Tommy Cook, along with CFO Ashleigh Greening, who with a notably impressive background joined the company earlier this year.
Cook, as founder is clearly very passionate about the business and that certainly resonates through as we speak, the enthusiasm perhaps boding well for a continued positive navigation through the current choppy economic waters.
To that end though, the CEO comments, “its actually going pretty well for us and we fortunately haven't seen much in the way of an effect from Covid and where with people working from home, its really been so far so good”.
As a business that operates in and around the vast global telecommunications space that includes providing testing solutions to validate the performance of critical network infrastructure, Calnex looks to be in a sweet spot moving forward, not least as the industry is seeing increased activity which should lead to ongoing demand.
And the areas Calnex focuses upon are very much in a growth market, its products being a key factor in enabling customers to deliver their own solutions to the market that are ready to be successfully deployed.
The test and equipment market alone driven by 5G is currently estimated at $1.2bn, whilst the cloud and ethernet service equates to circa $1.2bn providing for a combined $2.5bn, thus delivering significant annual growth of between 10%-12%, which provides plenty for the Scottish company to aim for.
Cook tells me that there are a number of players in the market with a half a dozen big hitters, along with a number of much smaller operators, but describes Calnex as very much being the de facto, whilst also adding, “good luck to anyone who wants to push us off”.
Certainly, there is a solid belief and optimism in the now firmly established business which already works for and with the biggest industry names across the globe by providing critical test and measurement products and services.
These include Cisco, Nokia, Samsung and Verizon who are just a few of the many customers that have contributed to strong growth which delivered full year 2020 revenue numbers of £13.7m which in turn returned a notable pre-tax profit of £2.9m.
Cook explains that Calnex effectively consists of two core arms, those being network emulation and synchronization software, the latter of which is a niche application primarily driven by base stations.
The core sales model of the business is therefore a bundle of both hardware and software, the latter of which are specific to each customer, depending on their own seperate requirements.
The manufacturing element is outsourced to a long standing partner where cook says "we have been working with Kelvinside Electronics for some years now, have a good relationship with them and they are ideal for us, it also helps that they are only twenty or so miles down the road from where we are located".
Much of what Calnex delivers is extremely complex with sophisticated platforms that sees it providing a broad range of solutions across the whole industry and which largely differentiates it from much of the competition.
Commenting on the hot topic of 5G, which clearly provides for significant ongoing opportunities, Cook explains that it isn't just one single entity, rather, there are lots of moving parts and the process does not stop there as it will continue to evolve and expand.
This process he says, will extend across the industry as demand for the likes of increasingly smaller cells or low-powered cellular nodes come on stream, resulting with ever more locations that Cook says includes the likes of lamp posts being utilized.
Calnex maintains its position in this process by providing the technology and services that vets and ensures such deployments work efficiently prior to being located out in the field, where Cook stresses that what it provides is absolutely critical for a customers successful deployment.
The CEO also expands on its own successful and growing market presence by pointing out that it works with a network of global resellers and distributors across the world and where, in its favour there is a high barrier to entry for newcomers.
A key element of the business is also Calnex ongoing maintaining of constant direct contact and ongoing strong relationships with underlying customers which is largely due to the highly technical sales process.
In speaking of the decision to coming to market he says,
“we had an angel syndicate come on board some years ago but we had subsequently reached a stage where we considered doing something similar by bringing in another major investor, but, on further consideration and discussion we decided that the IPO route would actually best suit the company going forward”.
That brought on board the highly regarded BGF which he informed me was already aware of the company and was joined by other well established institutions in what proved to be an oversubscribed placing with the former now sitting on a chunky 15% stake in the business.
As a resultant part of that process CFO Greenan explains that it enabled the company to exit a borrowing facility that had a fixed rate of 11% to one with much more favourable terms via Barclays, that now sees a rolling credit facility of £3m.
“We haven't actually drawn on that yet and don't expect to do so any time soon, but it is good to have it there”.
We have no other debt and that facility in a cost perspective is good for us, where if undrawn there is a charge of 0.75% above base"
That sounds like a real positive for Calnex and should deliver a decent annual saving too on what was previously paid and comes at a time when the company will no doubt be looking to deploy as much cash into driving further growth as possible.
Although Calnex has successfully delivered on growth organically, it has also made a few strategic acquisitions along the way and that is something that will continue to feature going forward, although obviously it will have to meet strict criteria.
Cook says that they would probably go for slightly larger targets than the previous purchases and that was one of the key reasons for going down the IPO route, which implies that accelerated growth is firmly on the agenda.
At the present time the company appears from the tone to be trading well although holders will no doubt learn more in due course, where Greenan says that the Interim Results will be out late next month, which should also be followed by a Broker note from Cenkos initiating coverage.
Cook acknowledges that Calnex is very much in a growth area, where with the evolving shape of the mobile environment and the increasing emergence of smart and connected cities, then its services are likely to be in increasing demand, as ever more systems and devices are developed and deployed.
Although the company doesn't have a guaranteed recurring revenue stream as one would find with a SaaS business, what it does have is a long established and growing customer base that sees companies returning regularly and which in turn also sees contracts extending on to as much as nine years.
The evidence to that end is clear to see, as revenues have moved from £8.4m in 2018, to £10.5m the following year to last years £13.7m. Adjusted EBITDA after development and amortisation costs has seen a movement from £1.3m in 2018, followed by £3.1m and £4.1m in the subsequent years, providing for a glimpse of the potential of future earnings as things scale up.
Importantly, Calnex enjoys both close and strong relationships with not only the leading market players, but the regulatory bodies that oversee the industry too, thus putting it in a strong position to bring new and innovative systems to the market.
With a current market cap of £46m the shares look far from expensive and could well attract wider investor attention come those interim results, along with a broker note to provide for some forward guidance.
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