- Annual revenue up 11 per cent to £22.9mn
- Reported pre-tax profit (before exceptionals) down from £3.1m to £2.5mn (13p)
- Full-year dividend per share held at 11p
- Closing net cash of £18.2mn (113p)
Maldon-based semiconductor chip designer and manufacturer CML Microsystems (CML:304p) downgraded profit guidance for the 2023-24 financial year in a pre-close trading update, so the results had already been well flagged (‘Why investors shouldn't bail on CML Microsystems’, 26 March 2024).
The issueis that some of CML’s customers and partners have been reducing stock levels, a trend that the directors don’t expect to clear until the second half of the current financial year. In view of the headwinds, the group’s trading performance was relatively resilient nonetheless. Adjust for a £3.3mn revenue contribution from the newly acquired Microwave Technology, which is trading above expectations, and CML’s revenue declined 4 per cent, far better than the 8.2 per cent decline in worldwide sales of semiconductors in 2023, according to World Semiconductor Trade Statistics. Although gross margin contracted from 76 to 71 per cent due to a change in mix, this was in part mitigated by the revenue growth.
True, short-term headwinds will persist until inventory levels completely unwind across end markets, but medium-term prospects remain unchanged. That’s because CML’s focus is on industrial and critical communications applications, in contrast to the memory, personal computer and consumer markets, which tend to exhibit more volatility. Moreover, key markets include mission-critical communications, wireless networks and satellite, industrial Internet of Things and broadcast radio. The Microwave Technology acquisition expands and complements CML’s growing product portfolio in high-growth market segments, too.
Forecasts point to another fall in profit
For the year ahead, analysts at Progressive Equity Research are pencilling in revenue of £24mn, but a fall in both reported pre-tax profit and earnings per share (EPS) to £1.6mn and 7.9p. On an adjusted basis, the research house is predicting underlying pre-tax profit of £2.9mn, slightly lower than their £3.1mn comparable in the 2023-24 financial year, and adjusted EPS of 12.8p (down from 14.5p). On this basis, the shares are rated on a prospective cash-adjusted price/earnings (PE) ratio of 15. Analyst Martin O’Sullivan at house broker Shore Capital pencils in adjusted EPS of 10.7p but “hopes to upgrade our estimates later in the year as the inventory correction abates”.
Following the results, CML’s share price fell 10 per cent and is back to the level at which I downgraded my rating to a hold in March 2024. The inventory overhang needs to clear before both investor sentiment and the earnings outlook improves, so the same advice stands. Hold.
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