CML Microsystems LON:CML, the Essex-based, AIM-listed chip designer and manufacturer, has had a generally positive year, in line with expectations according to Chris Gurry, managing director.
Speaking to The Armchair Trader, Gurry said “We have had solid growth this year but expected to be a bit further ahead by this time, as some of the inventory [of global semiconductor chips that manufacturers stockpiled during the Covid-19 pandemic] should have flushed through the system by now.”
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Just a few years ago, electronic product and automotive manufacturers were faced with a global shortage of semiconductor chips, the ‘brains’ that are an integral part of many of the devices of modern life. There ensued a stampede to build up inventories by many manufacturers in case the fabrication plants were mothballed for a prolonged period.
However, as the world came out of Covid, it was hit with global inflation and insecurity, in part caused by the impact of the conflict in Ukraine and its effect on global trade, energy and commodity prices. Central Banks acted the only way they know how to when faced with inflation, and embarked on a global exercise of raising interest rates, which had a detrimental effect on an already anaemic, post-Covid global economy and the global economy slumped into recession. The effect was most-felt in a cost-of-living squeeze by lower- and middle-income households in the developed world, whilst developing nations suffered across the board from rising food and energy prices.
Chip drought becomes a glut
As a result, consumer demand for electronic products, ‘phones and new cars dropped off a cliff and what had been a chip drought became a chip glut that affected chip manufactures from small to large, with even global titans like South Korea’s SK Hynix and Samsung suffering in the wake of bloated inventories.
CML Microsystems isn’t yet in the same league as Samsung, and does not produce memory chips, instead specialising in mixed-signal, radio frequency and microwave semiconductors for various communications markets, as Gurry explained manufacturing: “One chip, [with] many customers,” but it too suffered in the falling tide experience across the market.
So in its latest results CML Microsystems is cleaving to the premise that some growth is better than no growth, and when all is considered, a 5% increase in year-on-year revenue to GBP10.6m as reported in its last six month results (to end-September) was a positive return; as was the company remaining in the right column of the P&L Statement with a 9% increase y-o-y profit to GBP1.9m excluding GBP300,000 costs due to the USD13.2m acquisition of US-based Microwave Technology, Inc (MwT). a commercial wireless communication, defence, space, and medical chip manufacturer.
The MwT acquisition was a strategic buy by CML Microsystems to expand its product portfolio, strengthen its technological capabilities, diversify its geographic reach, accelerate growth, and enhance its competitive position in the global semiconductor market and, as Gurry explained: “[…] go up in frequency.”
CML Microsystems investing in R&D through the decline
Despite the market backdrop and the economic headwinds, CML Microsystems has been investing in R&D and growth (as evidenced by the MwT acquisition), building up its sales and marketing team, and committing 19% of revenues to research. The company’s manufacturing process is a scalable, fabless model where it outsources the actual chip manufacturing to fabrication plants in low-cost regions such as Taiwan and China. CML Microsystems makes use of this capital-efficient model for its entire product range.
Notwithstanding the weakness in the overall market, the company was still able to pay an 11p dividend per share for the year and buy-back GBP1.8m of its own shares. MwT allows it entry into the high frequency market but the chip maker has also been developing its DRM (Digital Radio Mondiale) capabilities.
DRM provides high quality stereo audio across long distances and wide areas using low-cost, low-power infrastructure, providing broadcast on Long Wave/Medium Wave /Short Wave radio plus data, and is being increasingly adopted as a lower-cost alternative to DAB in developing markets, notably India, China, Pakistan and Indonesia.
CML Microsystems underlying growth story
With its investment in DRM and MwT the company can appeal at (literally) both ends of the spectrum and now has the capability to market into five distinct areas: Wireless & Satellite, Network Infrastructure, Internet of Things, Aerospace & Defence and Broadcasting.
CML Microsystems opened the week (11th December) at 376.73p. Like many chip manufacturers, its shares have taken a battering over the past few years and had a rocky run in October and November, falling as low as 340p on 24th October, although it has experienced a moderate recovery subsequently. Over one-year its share price has fallen -23.1% but is 33% up on where it was at the height of the pandemic three-years ago. The company’s shares have ranged between 340p and 596p over a 52-week period and CML Microsystems has a market cap of GBP60.4m. The company has no debt.Martin O’Sullivan, a research analyst for broker Shore Capital, which has CML Microsystems under coverage, said: “We see good upside potential if, as we expect, CML continues forging ahead in its chosen markets, ultimately aided by a normalisation of the interest rate environment.”
He continued: “Despite the challenging macroeconomic conditions, CML’s trading performance in H1 FY24A was positive and generally in line with management’s expectations […] In our view, the [latest] results demonstrate that CML’s underlying growth story is resilient and attractive. What is more, the global target market for the CML’s semiconductor products is large and the medium-term market dynamics are positive…”
Growing product portfolio
O’Sullivan concluded: “The MwT acquisition expands upon the group’s growing product portfolio and complements its existing capabilities, providing essential knowhow and experience in high-frequency system-level understanding, product manufacturing and packaging techniques. In effect, CML is upweighting its business in high-growth areas, which should pay large dividends in the coming years.”
Gurry is still – at least publicly – remaining cautious due to ongoing market uncertainty but is confident that the company is on the right track and with the addition of MwT has the capabilities to grow its business in new and existing markets and multiple fronts. CML Microsystems becomes ‘One to Watch.’
