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On the technology beat – Investors’ Chronicle

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  • Ebitda up 14 per cent to $4.6mn on eight per cent higher revenue of $34.8mn in nine months to 30 September 2022
  • Operating profit rises 5 per cent to $3.5mn after one-off costs of PSK acquisition
  • Strong trading across all three divisions
  • Net cash of $5.2mn (5p a share) equates to 10 per cent of market capitalisation

Israeli-based technology group MTI Wireless Edge (MWE:51.5p) is realising material benefits from January’s $1.2mn (£1mn) acquisition of a 51 per cent stake in PSK, an Israeli developer, manufacturer and integrator of communication systems and monitoring systems for the country’s defence market.

Buoyed by contract wins including a $10mn award in the summer from the Israeli Ministry of Defence, and last year’s strategic agreement with a [undisclosed] major defence customer, MTI’s Summit electronics division increased operating profit by 40 per cent to $1.8mn on 19 per cent higher revenue of $12.4mn in the first nine months of 2022. Representing 40 international suppliers of radio frequency/microwave components, the addition of PSK is enabling the unit to move up the supply value chain as well as offering turn-key solutions (fixed and mobile communication, telemetry and signal intelligence systems).

The performance of the electronics unit was the key driver behind MTI’s eye-catching third quarter performance, the division delivering $0.67mn of quarterly operating profit, or more than half the total of $1.3mn, hence the 15 per cent profit growth reported for the third quarter.

Chief executive Moni Borovitz also highlights contract momentum in the group’s antenna division. For instance, last month MTI won two contracts worth $1.25mn including a 5G backhaul award in India, a key market for MTI. The country has recently completed a 5G auction that is expected to lead to rapidly increasing demand for new Eband towers. MTI is working with five of the seven leading OEMs in the sector, so is well positioned to not only win contracts, but be able to fulfil them now that microchip component supply shortages are finally easing. In the third quarter, the antenna division delivered $0.16mn of operating profit, two-thirds more than in the whole of the first half.

MTI offers investors exposure to climate change, too, through its Mottech real-time irrigation monitoring, control and reporting software offering. Municipal authorities, commercial organisations and the agricultural industry are all key end markets. Importantly, Borovitz reports a good level of renewals with key municipal customers, decent price increases, and a growing awareness of Mottech’s eco-friendly solutions which can reduce water consumption by more than a third. The division accounted for 36 per cent of MTI’s operating profit of $3.5mn in the nine-month trading period.

So, with the order book in fine shape, and $4.58mn of house broker Shore Capital’s annual cash profit estimate of $5.7mn already booked, then MTI looks well on course to deliver the 10 per cent forecast rise in full-year pre-tax profit to $4.4mn on revenue of $45.7mn. Analysts are looking for revenue of $48.8mn, cash profit of $6.2mn and pre-tax profit of $4.9mn in 2023, sensible projections in my view. On this basis, expect full-year earnings per share (EPS) of 4.1c (3.5p) to rise to 4.8c (4.1p) in 2023, implying the shares are trading on price/earnings (PE) ratios of 14.5 and 12.5, respectively.

Moreover, the board have a progressive dividend policy, having paid out 5.3c (4.5p) a share since I initiated coverage on the shares, at 40p (‘Alpha Research: Tapping into 5G climate change technologies’, 5 September 2020). Future pay outs are well underpinned by prospective free cash flow yields of 6.1 per cent (2022) and 8.3 per cent (2023) which in turn support forward dividend yields of 5 per cent (2022) and 5.5 per cent (2023).

Admittedly, MTI’s shares have drifted 10 per cent since I covered the interim results (‘A smart play on defence spend, climate change and 5G’, 15 August 2022), albeit in an unfavourable market for technology shares. However, the investment case remains sound and the rating is modest for a cash-rich company servicing key markets which offer attractive structural growth: demand for next generation 5G networks; climate change; and increased defence budget spending. Buy.

 

Technology sector delistings

  • Allied Minds to delist shares on 30 November 2022
  • ThinkSmart to delist shares in early December and return cash to shareholders

Shareholders in Allied Minds (ALM:9.7p), a Boston-based intellectual property (IP) commercialisation company focused on investing in early-stage companies with disruptive technologies, have overwhelmingly voted in favour of delisting the shares at the end of this month. However, I wouldn’t be selling out at what is likely to prove to be a rock bottom price.

That’s because the group’s 23.96 per cent stake in Federal Wireless, a group that offers wireless connectivity for cloud-based technologies by providing customers with a high performance, secure private wireless network, has a read through valuation of $72.3mn (25.6p a share), or 2.6 times Allieds Minds’ own market capitalisation of £23.3mn. Some shrewd heavyweight investors backed Federal Wireless’ equity raise earlier this year that raised $72mn and placed a $302mn post money valuation on the technology company. Factor in Allied Minds’ $10mn (3.5p a share) cash pile and other investments worth around 6p a share, and my sum-of-the-parts valuation of 35p a share is almost four times the current share price.

So, although the investment hasn’t gone to plan since I first suggested buying the shares (‘Exploit Allied Minds’ huge margin of safety’, 30 July 2020), partly because the share price discount to the underlying value of the group’s investments has widened dramatically, I can see scope to recover 85 to 90 per cent of your original capital when Allied Minds’ remaining holdings are eventually sold and cash returned to shareholders. Hold.

Investors in Aim-traded finance company ThinkSmart (TSL: 31p) have approved a scheme of arrangement that will see them receive a cash distribution for the company’s holding in New York Stock Exchange-listed fintech fund Block (US:SQ – $64.60). The shares will be suspended at 7.30am on Wednesday, 23 November, delisted on 5 December 2023 and shareholders’ pro-rata holdings of Block shares will be sold between 5 and 7 December 2022 with cash proceeds paid to them shortly thereafter. At current prices and exchange rates, expect a cash distribution of 31.3p a share.

I first suggested buying ThinkSmart’s shares, at 14p, my April 2020 Alpha Research Report, and including total dividends of 8.5p a share the holding is on course to produce a 184 per cent total return, albeit the tech sector rout has materially eroded the paper profit. Hold for cash return.

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