It weighs about 20 grammes, is jam-packed with sophisticated electronic wizardry and fits in the palm of a hand. Any ideas? I’m describing one of Telit’s new family of advanced machine-to-machine (M2M) modules that can knock the socks off many smartphones in terms of communication capability. These clever devices are deployed within the likes of car navigation systems, vending machines, asset-tracking software and point-of-sale terminals.
The automotive sector in particular is undergoing a monster of an information-technology revolution. Within the next three to five years, on-board M2M modules could be fitted as standard in most vehicles to relieve traffic congestion, reduce accidents and improve driver safety. Heavy adoption is also predicted in healthcare, for remote patient-monitoring and home care.
According to Beecham Research, a market research firm for the technology sector, the M2M market is set to soar 12.5% a year through to 2015. That expansion will provide an excellent tailwind for Telit – the world’s third-largest supplier with a market share of 22% (closely behind leaders Sierra Wireless and Gemalto).
Telit Communications (AIM: TCM)
If all that is true, why did the stock plunge 30% in October? Well, although revenues were up 31% in the first nine months of the year, underlying profits have been hit by delays in the deployment of a few key, high-margin projects. This was disappointing, but it should only prove to be a temporary hiccup. And it needs to be set against the more positive wider context – by implementing M2M, clients can realise huge efficiency savings, and launch essential new services.
The City is anticipating 2011 turnover and underlying earnings per share of £116m and 3.25p respectively, rising to £135m and 5.26p in 2012. The balance sheet is strong with net debt (debt minus cash) of only £3m. I value Telit on a ten times earnings before interest, tax and amortisation (EBITA) multiple. Assuming sustainable margins of 8%, that generates an intrinsic worth of 75p a share. The chief executive, Oozi Cats, seems to agree. He snapped up 300,000 shares at 44p recently, bumping up his stake to 19.75%.
As with any hi-tech firm, investors need to be wary of technology changes, as well as the challenges of competition, foreign-exchange movements and occasional component shortages. But none of this should put you off buying the stock.
Northland Capital has a price target of 80p.
Rating: SPECULATIVE BUY at 48p (market cap £50m)