CML MICRO COULD BE WORTH A CONNECTION - 15/12/23

When it comes to identifying quality, well run operations on the AIM, stocks that receive a positive thumbs up on the box ticking front can often be few and far between.

One subject that has recently caught my eye though does appear to fit the bill, where it has a proven track record of delivery across a number of fronts that investors warm to.

Amongst the attractions on offer for this particular subject, is a robust balance sporting a significant net cash position, a history of returning money to shareholders and some current disposable freehold property assets on the book, all supporting a business that looks set to continue delivering on the growth and profit front.

CML Micro based in Essex has been around since 1968, where, having commenced life as designer and creator of single chip solutions for components, it has subsequently evolved into a world leading specialist across the now wider semiconductor space.

This sees it heavily embedded in the designing, development and supplying of mixed signal, radio frequency and microwave semiconductors for the global communications markets, where it boasts some well-known names as customers.

Although UK based with a rich heritage, CML also has an active and now increasing presence in the US, along with Singapore and China where it has operations and offices which have been boosted by a more recent acquisition based in the US.

Although, like any other technology focused business CML has not been immune to economic headwinds and the like over the years, it has nevertheless demonstrated a commendable and consistent track record for delivery over time and looks an attractive investment proposition to my eye.  

Having seen its share price at a low of just 33p back in 2009, they subsequently peaked at £5.90p five years later and have since traded in a range from that high, down to a £2.56p low which was seen in 2020.

Currently, having very recently released its Interim results for the six months to September 30th 2023, the shares now stand at £3.76p and trade on a PE of 17.  

Whilst that may on the face of things look up with events, particularly in the current climate, it is worth factoring into the picture the abundance of net cash here, which is forecast to see a year-end figure of circa £19m, along with the stock also standing at a discount to the wider sector.

With a market cap of £58m the cash alone accounts for a significant slug, across a business that is expected to deliver adjusted pre-tax profits of £4.4m for full year 2024, although that figure could prove on the conservative side, reasons for which I will come to in due course.

In order to hear more on the business and its investment potential, I have been fortunate enough to catch up with management, which included Group MD Chris Gurry.

Speaking on the business both past and present, Gurry told me, “although the business has certainly been around for a long time, over the last five years it has undergone something of a real transformation. If you go back to 2018, half of the businesses revenues then were coming from the wireless communications sector, whilst the other fifty per cent came from solid state storage.”

At that time Gurry added, they saw a tremendous opportunity for the wireless comms operation going forward, whilst in contrast, they equally identified some severe headwinds emerging for the storage arm.

After taking a good look, the end result was that the storage operation was sold off to its largest customer for $49m, which in turn saw half of the received funds being returned to shareholders shortly afterwards.

Since then, the focus has been on driving investment into the remaining business, which as part of that process saw the small acquisition of an engineering team based here in Cambridge.

The team in question was part of Plextek and had completed in-house, more than one hundred designs for leading global semiconductor companies, so it made for an ideal purchase to broaden the know-how, offerings and reach of CML.

That addition to the company was subsequently followed by a much larger acquisition, which was announced back in January of this year, coming in the shape of Silicon-Valley based semiconductor company Microwave Technology.

The deal was quite substantial in monetary terms for CML, with the total amount payable peaking at $18m, being made up of a combination of both cash and shares.

MWT is itself a producer of semiconductor devices for wireless communication applications, that amongst others takes in medical devices along with a particular emphasis on defence, so it looks to be an excellent fit providing for future growth opportunities.

It brings with it a number of benefits, including close to an extra one hundred products, thus providing expansion to CML’s own product portfolio along with increased knowledge and further market penetration.

CML, I was told, is currently bedding those products in, alongside the specific training required, in preparation for moving into the sales channel in the new financial year.

Providing a brief overview as to where CML now sits, the CEO explained, “we are a fabless semiconductor company that is very much focused on developing and marketing standard semi- conductors.  

This sees us focusing on a particular application area and developing a chip for that and selling the same chip to as many different customers as possible.”

The model is a proven scalable and profitable one, which provides CML with the opportunity for increased revenue and reach without being tied to any one end customer or any specific market.

In terms of the end delivery, Gurry added that the company is very much focused on the Industrial commercial space as opposed to the consumer spot which they do not serve, thus providing more predictable and reliable markets with end user diversification.

This sees it serving many big and well-known names, that includes Motorola, Kenwood and Cambridge based TETRA radio specialist Sepura, each of which Gurry says use at least one of the CML semiconductor products, rising to as many as five.

The radio sector in particular is one they have been in for some time I am told, cutting their teeth during the seventies and eighties in analogue radio.

That exposure has evolved however and sees the company’s products now used extensively, particularly in mission critical environments, which is not merely across the more obvious end markets such as public safety, emergency services and utilities, but also marine, mining and construction, along with other areas that even takes in retail outlets.

Whilst the wireless aspect continues to be a major contributor and generator of revenues, CML is also active across the internet of things, network infrastructure, the 5g space and has also more recently moved into other new and potentially highly profitable areas, which provides for an increasing growth runway opportunity for the business.

Expanding, Gurry said, “satellite products are already now launched and we expect to be generating revenues across that space in the next calendar year with achieved design wins.”

Aerospace and defence is another sector area of high interest, where he explained that it is more defence rather than the former that is prevalent and where revenues are growing.

“It used to be less than five per cent of the group’s revenue, but with the acquisition we have made in Silicon Valley, that could be ten to fifteen per cent going forward, as that company is strong across US defence.”

To perhaps amplify the importance and potential from its US purchase, it is worth noting that the deal announced back in January was somewhat frustratingly only completed as recently as October.

This was due to it having to receive US Government and National Security clearance, given the nature of much of the business and the high barrier to entry.

Despite the frustratingly long time to complete, Gurry says ultimately it is very positive for CML as they are now in an excellent place with the clearance and acceptance which should bode well for the future.

Whilst there is undoubted potential from the aerospace and defence opportunity where progress should be interesting to monitor over the next few years, there is also what Gurry describes as being an exciting and brand new opportunity for the company.

This concerns the broadcast sector, where in particular he spoke in detail of countries that have adopted a different standard to the well-known DAB radio standard that we are perhaps more familiar with, this being DRM (Digital Radio Mondiale) and which sees highly populous countries such as India, Pakistan and parts of China embracing it.

Despite that adoption and potential for its expansion Gurry added, “We recognised that there were actually some things holding back this market, with one of those being countries not actually mandating it for digital radio, but that is now happening.

Another though, was that there just wasn’t a commercial cost effective and technically capable product chip wise that was actually available to produce a portable radio.”

As a result, in order to address the issue the CML team set about developing a product specifically for this market some years ago, aligning with technology experts Cambridge Consultants, the latter of which amongst others spun out the highly successful Cambridge Silicon Radio and Alphamosiac.  

That teaming up has resulted in a successful product not only being developed, but launched as recently as September of this year and now provides for some exciting growth opportunities ahead, not merely in the vast markets already mentioned, but in others too such as Latin America.  

As some thirty-eight per-cent of the global population is without internet or even a TV, the module created, which is available for circa  ten dollars on a volume basis can run for over thirty hours from a pair of AA batteries or even solar and should be eagerly embraced by radio manufacturers that are ready to supply the market.  

DRM is suitable for all broadcast bands from low to very high frequency (150kHz to 222MHz) with long-range wide area to short range high population density broadcasting and allows for premium listening experiences.

Importantly, the new module developed by CML in conjunction with CC boasts amongst its benefits the tuning to 150kHz to 108MHz with no-gaps supporting AM/FM/DRM broadcasts.

In terms of the revenue generation potential from DRM, Gurry expresses a highly positive note, citing the expectation of mid-single digit millions of units being shipped three years down the road.

If that plays out as envisaged, he adds that it would equate to more than their overall revenues as they stand and despite appearing to be somewhat out on the horizon right now, he adds that it certainly isn’t inconceivable for CML to achieve that and double their current revenues.

The actual cost of the module is actually around $15 which is in keeping with CML’s 75% gross margins, but obviously on bulk or high quantity orders that price would reduce to a figure as previously highlighted.

It would nevertheless prove highly lucrative for the company on mass supply and is a ready-made solution for the significant numbers of would-be end users.

Returning to the Interim Results that were announced, first half revenue came out at £10.6m with gross profit of £7.9m representing five and four percentage point increases.

That was a decent outcome given the economic backdrop, particularly across the semiconductor space with CML showing resilience within the performance.

Importantly, there is no debt on the balance sheet, with cash at the halfway period registering £21.m, an impressive figure after share buybacks and dividend payments.  

Broker Shore Capital currently has full year 2024 revenues pencilled in at £23m with expectations of EBITDA of £6.8m and adjusted pre-tax profits at £4.4m, giving EPS of 22.2p.

There is arguably potential for a revision upwards on those numbers however, as there is nothing in the figures for the US acquisition, whilst the company also has disposable property on the market, including one in Fareham valued at £2m.

Whether numbers for the current full year are in-line, or on the conservative side is perhaps academic, as it is next year’s expectations and beyond, that will be of greater interest.

At present, there are no forecasts from either Shore or Progressive for the next financial year 2025, but with the acquisition set to make a meaningful contribution, along with the expansion into wider markets and the expectation of property sales, then CML looks well placed to continue delivering on the growth path.

Further acquisitions do not look likely in the foreseeable future, with management keen to stress the sizable opportunities for organic growth where there is also a clear and ongoing commitment to continue investing heavily into the business.

Despite the current headwinds and more difficult climate, CML’s performance has been positive, particularly in light of the wider sector performance.

Importantly, the target markets for the company’s semiconductor products are extremely large, particularly in an increasingly connected world with ever new or improved products coming to market.  

Although CML isn’t one of the AIM’s more familiar names and largely remains under many investors' radar, it possesses a number of positive attributes on the investment front.

Indeed, whilst it may as yet have escaped the attention of many private investors, there are some decent and highly regarded Institutions that are on board here having bought into the story, with Premier Miton holding more than 11% followed by Otus Capital, Herald and Liontrust, whilst,  Chris Gurry himself has plenty of skin in the game with a 7.8% holding.