CML Microsystems: Growth Interrupted
Edison | Jun 11, 2014 02:12AM ET
While CML Microsystems’s (CML.L) full-year results were a touch ahead at the earnings level, FY15 will be affected by a number of customer transition issues, particularly an end-user inventory build-up related to the exit of a customer from the industrial storage market. We believe these are largely transition issues, which should normalise over the course of 2015, while investment in wireless chipset solutions and broadening the storage portfolio should support a recovery in growth and margins in FY16.
Full-year sales at £24.4m were in line (Edison £24.4m), while adjusted PBT (£5.9m vs Edison £5.7m) and adjusted EPS (29p vs Edison 28.0p) were slightly ahead. The balance sheet is robust, with year-end net cash at £11.4m (Edison £10.6m), up from £9m last year and the dividend has been increased to 6.25p (Edison 6.0p) vs 5.5p last year. However, a number of issues are expected to hurt trading in FY15, particularly the exit of a significant customer from the industrial segment, which has resulted in end customers building inventory ahead of this. In addition, the uptake of SATA chips within CML’s industrial vertical has been slower than anticipated, while trading in wireless has been affected by volatility related to government spending and lower sales of high-volume legacy parts.
h3 Reasons to expect a bounce-back in 2016/h3While the excess inventories in storage will take some time to work through, given CML’s strong market share in the segment, we expect trading to normalise as this business should be taken up by other customers. Progress with wireless chipset customers and investment in broadening the storage portfolio to add SATA, SD and USB products should translate into meaningful incremental revenues in 2016.
h3 Valuation: Recovery potential once back on track/h3With a highly operationally geared model, a 20% reduction to our FY15 sales forecast falls through to a 60% reduction in EPS. Our 2016 estimates are new, with a recovery in sales growth (+19%) driving 92% earnings growth to 23.7p. We believe these estimates are cautious. Given the mix of upside potential with near-term trading volatility we believe the rating is fair, with the FY15 P/E of 34.4x a premium to peers on a depressed earnings number and 17.8x FY16 in line. We look for further signs of a normalisation in trading within the established storage business and clarity that the wireless chipset and newer storage products are gaining sales traction as the key catalysts for a share price recovery.
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