Interactive Investor

Why this tech share is racing to three-year high

It may have been short on words – just 99 of them on current trading - but CML Microsystems' second-half update certainly packed a punch. News that full-year figures due out on 13 June will beat analyst expectations lit a fuse under the share price, and a spectacular rally continues.

The semiconductor manufacturer reported "pleasing" progress this year, indicating 12-month revenue will be above £27.6 million, with pre-tax profit of £4.2 million and a net cash balance of £12.4 million – on broker SP Angel's forecasts, these were beats of 3%, 5% and 13% respectively.

Sales are up 21% year-on-year, boosted by last July's £3.6 million acquisition of China-based part-competitor Wuxi Sicomm Technologies, although SP Angel estimates 16% of that growth was organic.

Further to these numbers, CML is a rare beast in the technology space in that it actually has a "progressive dividend policy", says fellow broker Cenkos Securities, albeit the yield is a modest 1.7% - the £80 million firm reinstated the payout in 2011, which has since doubled to 7p.

Admittedly, it's not been an easy ride for CML shareholders. The loss of a major customer three years ago saw sales slump by over 11% from £24.6 million in 2013 to £21.8 million in 2015. After the news, the stock halved in value in just five months to a November 2014 low of 255p.

But it's been in recovery mode ever since, backed by big hitters such as Miton's Gervais Williams. The small-cap specialist fund house currently owns more than a fifth of the business.

CML shares had already risen 70% since that 2014 low and they surged 10% more Monday to their highest since their June 2014 collapse. However, at 480p, they've kissed the 62% Fibonacci retracement of its aforementioned plunge, which could prove significant if it's to fill the gap-down witnessed during the crash three years ago.

More upside?

SP Angel has a 12-month target price of 510p, giving potential further upside of about 7%, although it may need a further catalyst to breach the 480p barrier.

That said, its 2017 price/earnings (PE) ratio, minus cash, of 18.3 times falls to 16.1 for 2018. That's a discount to the electronics sector, which is trading on a 12-month forward PE of 19 times, according to Morningstar.

"Given intellectual property, market opportunity and cash generation, we believe that CML remains good value for future earnings growth," SP Angel adds.

Cenkos agrees, noting that its forecast 2018 enterprise value/sales ratio of 2 times is low for the tech sector average of 3 times. "The shares have performed well this year but the capacity for further outperformance is high in our opinion given the strong exit run-rate from last year," it says.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.