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Can Telit Communications recover from 44% crash?

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Can Telit Communications recover from 44% crash?

Investing successfully in Telit Communications (TCM) has always been about timing. Traders who got it right cleaned up, but holding too long was always the risk. And owning Telit over the weekend would have been expensive after the AIM techie today admitted it swung to a half-year loss and scrapped the dividend.

Brave investors could have snapped up Telit for around 8p a share in early 2009. They hit 357p in 2015 before peaking at 379p on 1 May this year. A few days later the company could only get a £39 million share placing (for acquisitions) away at 340p, and it's been downhill ever since.

Monday's 44% crash had them at just 143.25p briefly, extending the dive from its high to as much as 62%.

Revenue at Telit, whose technology connects machines to the internet via both cellular and short-range networks, grew by almost 7% in the first six months of 2017 to nearly $178 million (£136 million).

However, heavy investment in acquisitions at company, which this year received the first purchase order from Tesla (TSLA) for all Model 3 cars, wiped almost a third off adjusted cash profit to $14.7 million.

Buying Stollmann in 2016 and GainSpan this year triggered a surge in spend on both research & development and marketing, causing a plunge from $4.7 million pre-tax profit a year ago to a loss of $6.7 million this time.

We're told it will splash out less on R&D and marketing as a percentage of revenue both in the second half and in 2018. Telit's top line is also typically weighted to the second half of the year, so one would normally expect a pick-up over the next few months.

"Overall, we remain confident of a strong second half performance," writes long-serving chief executive Oozi Cats, who currently owns 12.6% of the business.

However, the gap will be far more dramatic this year, and that's a worry for investors.

There were also supplier delays in obtaining US certifications for so-called Long-Term Evolution (LTE) - a standard for high-speed wireless communication - products. Again, these should be received in "the coming weeks" and drive sales in the second half, but traders are cautious.

And it's easy to understand that nervousness given the wide range of profit outcomes indicated by latest company guidance.

Expect an increase in full-year revenue to $400-$430 million versus $370 million in 2016, says Telit. But adjusted cash profit could be anywhere between $47 million and $60 million - as much as down 13% or up 10% - compared with $54.4 million a year ago. We'll see.

Of course, a spectacular price plunge like this inevitably attracts bargain hunters. And, by lunchtime, Telit shares had bounced off their 143p low to trade at 176p, a gain of over 20%.

We've seen Telit shares recover sharply from setbacks before and, as always, the trick is to identify whether these are just one-off events, or if there's a deeper problem lurking somewhere here.

First impressions are that it's the former, but markets don't take shocks like this well, and there's a repair job to be done at Telit. To help, the company has brought in finnCap as nominated advisor and joint broker. If history is any indicator, new brokers are keen to publish their thoughts, which typically focus on the positives.

It's also worth noting here that finance director Yosi Fait last month exercised 500,000 share options at 206p, selling the resulting 173,567 shares plus another 315,000 at an average price of 310p. That's what I call good timing.

Watch to see if he and other directors are as keen to buy now that the shares are considerably cheaper.

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.

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