Technology growth

Tapping a poorly rated tech growth stock

  • Cash profit up 57% to £4.3m on annual revenue up 29% to £17m, beating analysts’ profit estimates by 11%
  • New product launches gain popularity
  • Confident outlook for the 2022/23 financial year
  • Potential sale of surplus land to release windfall gains
  • Net cash of £25m (157p) represents 43% of market capitalization

Maldon-based semiconductor chip manufacturer and designer CML Microsystems (CML:365p) smashed analysts’ full-year earnings forecasts, a performance driven by the recovery in established voice and data-centric markets as well as secular drivers.

CML is a pure-player in the fast-growing industrial communications market, supplying integrated circuits to distributors and system integrators. The vision of the administrators is to be the semiconductor partner of choice for technology innovators and to exploit the opportunity for exponential growth in data consumption through the expansion of CML’s addressable market in mega trends ( Industrial Internet of Things (IIoT), 5G and Industry 4.0).

For example, to meet the future needs of 5G networks that operate on millimeter wave radio frequencies, CML has provided customers with a suitable power amplifier solution that meets rigorous technical specifications, and with improved efficiency and reduced heat generation. The higher frequencies that future 5G products will use offer higher data rates, greater capacity, better quality, and lower latency.

The majority of sales are currently generated by professional mobile radios (the network of choice for police, ambulance services, military and other critical infrastructure markets) and data-centric wireless applications ( critical infrastructure, utilities, smart grid), but revenues from 5G infrastructure and satellite communications are expected to grow significantly over the next few years. New product launches are also gaining momentum, as CML won contracts with two major customers in the areas of advanced counting and vehicle tracking.

A rock-solid balance sheet is another bright spot, as CML’s net cash position of £25m is expected to be boosted by the potential sale of an investment property in Fareham and 19 acres of surplus land at the head office of the company in Maldon. Subject to successful planning permission, CML already has buyers lined up to acquire the land. Property broker Shore Capital believes the £12million fair value of the land and CML property “could be significantly higher with proper planning consent”.

Shore expects adjusted pre-tax profit, earnings per share (EPS) and dividend to all rise by a fifth to £2.5m, 15.5p and 10.8p, respectively, over the 12 months to March 31, 2023, implying that the shares are rated on a cash-adjusted forward price-earnings (PE) ratio of 13 and offer a forward-looking dividend yield of 3%. The forward earnings multiple could drop sharply if physical assets and land are sold, and provide the board with additional firepower to make follow-on acquisitions or distribute more special dividends.

I initiated coverage, at 400p (Alpha Report: “Take advantage of semiconductor megatrends”, February 4, 2022), reiterated that the advice before the results (‘Leverage a high-growth, low-rated tech game,” April 13, 2022), and maintain my fair rating of 550p. To buy.

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

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