CML Microsystems: Looks Well Set To Remain On A Positive Trajectory

Tracking slightly ahead
CML ’s (LON: CML) IMS flags that trading has been slightly ahead of market expectations, supported by a broad-based recovery in market conditions, the normalization of inventories in storage and the commencement of chip set shipments to a new customer. We are not changing our estimates, but the company looks well set to remain on a positive trajectory from here. We believe that this is reflected in the FY16 P/E rating of 16.2x.

Broad based recovery in trading
CML’s trading recovery has continued into H2, with performance in H2 (historically the weaker period) on course to exceed H1 and operating results tracking slightly ahead of market expectations. We understand that recovery was broad based. Trading in the storage business normalized following the inventory build-up related to the exit of a customer from the industrial storage market last year. Sales into wireless have improved, again driven by a broad-based demand recovery, but also helped by the commencement of chip set shipments for a satellite M2M product. Cash balances have increased from the £11.6m H1 level, although the council’s refusal of a revised planning application for building on land at the company’s Oval Park headquarters has reduced the likelihood of a potential cash windfall.

No estimate changes, but platform for growth in place
We are not changing our estimates, but we believe that they are well underpinned for FY15. Progress in securing wireless chip set design wins and more customers for the broadened storage portfolio should support a return to operationally geared growth in FY16 although visibility is clearly more limited this far out. Results are also dependent on the timing of customer product launches as well as underlying demand. Nevertheless, the company has a strong market position in the niches in which it operates and the product set expansion across storage and wireless should support a continued growth profile beyond our forecast period. The company’s first products stemming out of the company’s RF and mixed-signal design team (established in April 2013) should start contributing to the mix in FY17.

Valuation: Up with events for now
The company’s FY16 P/E of 16.2x is in-line with the average, of an albeit imperfect peer group, consisting of UK-listed hardware companies and larger non-consumer focused storage and wireless chip companies. With an operationally geared model, better than expected revenue performance should reduce this multiple considerably, but pending more visibility on FY16, we believe the share price looks up with events as it stands.

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