• First quarter pre-tax earnings increase 25%.
• Net cash up 10% year-on-year confirms forecasts of a double-digit dividend increase.
• All three divisions are doing well.
Shares in an Israeli-based technology group MTI Wireless Edge (MWE:65p) have succumbed to profit taking since I covered the annual results (‘Small Caps with Upgrade Potential”, March 1, 2021), having doubled in value over the previous six months after launching the hedge, to 40p (Alpha Report: “Harnessing 5G Technologies and Climate Change”, September 4, 2020).
First quarter results and news of new contract wins indicate that the stock price reversal is seriously overdone. Indeed, MTI increased its pre-tax profit by 25% to US$0.9 million on a 4% increase in revenue of US$10 million in the three months to March 31, 2021. The growth was organic as one would expect given that all three MTI divisions have strong business prospects driven by continued structural growth in their respective end markets: global warming and climate change; increased defense budget spending; and the demand for next-generation 5G networks.
MTI’s Wireless Water Monitoring and Management Systems Division responds to water scarcity using Motorola’s advanced IRRInet communication technologies. The company continues to win new contracts, the latest being a C$300,000 award from a major Canadian city. This contract confirms MTI’s decision to open a new office in Alberta, with the aim of increasing recurring revenue from service and maintenance contracts and getting closer to end customers. MTI also extended a $2.5 million contract with a leading Israeli municipality from two to four years. Global warming is increasing the need for more efficient irrigation systems that reduce water and electricity consumption, a factor that underpins the strong demand for MTI’s technology.
MTI’s Summit electronics division, which represents 40 international suppliers of radio frequency/microwave components and sells these products to customers in Israel and Russia (fifth in divisional revenue), reported another strong quarter, driven by continued demand from its core defense and technology customers in Israel and Russia. Importantly, the demand for future design solutions remains high, a leading indicator of future business prospects.
The group’s antenna business made only a small operating profit last year, but it is starting to land bigger contracts for 5G backhaul antennas as mobile network operators roll out 5G services to higher bandwidth. The business is also expected to expand. Chief Executive Moni Borovitz notes, “The Covid-19 pandemic has highlighted to the world the importance of mobile connectivity and this has accelerated the global rollout of 5G services. The adoption of our 5G backhaul solution is progressing positively.
Another key element for me is the exceptional performance of the group in terms of cash. Even though MTI paid a dividend of $2.2 million in March, net cash increased 10% to $9.5 million year-over-year, a sum worth 7.5 pa per share . This adds weight to analysts’ expectations of a further double-digit dividend increase to 2.8¢ (2p) in 2021, implying that the shares offer an attractive prospective dividend yield of 3% and which is also good underpinned by excellent prospects for strong growth. earnings growth in the years to come.
Analyst David Johnson of in-house broker Allenby Capital maintains full-year pre-tax and EPS profit estimates of $4.9m and 3.14p, down from $4.05m and 2.7p in 2020 , implying that MTI’s shares are rated on a cash-adjusted basis. price/earnings (PE) ratio of 18 after taking into account the expected net cash at the end of the year of US$10.2 million (share of 8.3 pa).
Based on a 6% annual revenue increase in 2021 and 2022 to $43.4 million and $46 million, respectively, Allenby expects MTI to increase pretax profit and EPS to 5 $.45m and 3.5p in 2022, implying that the shares are on the basis of an anticipated cash-adjusted PE ratio of 15.7 for fiscal year 2022 after taking into account a projected year-end cash of US$12.1m (share 9.7pa). That’s not a hard-hitting note for a company that plans to increase EPS by 30% in fiscal 2021 and 2022, and also offers a phased dividend policy.
I believe that taking profits since my last article represents a repeat buying opportunity and I maintain my 100p improved target price. To buy.
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