As you may have noticed, we all seem to be going broadband crazy. Not only are there nearly ten million high-speed internet subscribers in the UK, but many, like myself, are enjoying the benefits in our homes of short-range (up to 100 metres) wireless connections (“wi-fi”), offering the convenience of multi-user access without the need for messy cabling. However, broadband networks known as “Wimax” are now being installed by the likes of BT and Pipex in cities across the UK to cover much wider areas (up to 10km). And in the US, Sprint recently announced that it plans to spend $3bn (£1.6bn) building a national Wimax infrastructure.
Gamble of the week: MTI Wireless Edge (Aim:MWE, 48p)
But this is just the beginning. In the less-developed regions of Asia, eastern Europe and South America, where there are large populations but poor fixed-line communications, Wimax is expected to be increasingly deployed.
Although Wimax will take time to be adopted, the early signs are encouraging. According to Skylight Research, the market is estimated to be growing by around 40% a year and hence offers enormous medium- to long-term opportunities for businesses operating in this sector.
One such company is MTI Wireless Edge, which has a 25% share of the global static wireless broadband antennae market. MWE is based near Tel Aviv and was floated by its parent company (MTI Computers) on Aim at 39p in March, raising net proceeds of £5m to fund future growth. MTI Computers still owns around 50% of MWE.
MWE sells its patented wireless antennae to the world’s leading original equipment manufacturers (OEMs), such as Alvarion and Airspan. It specialises in flat panel (as opposed to, say, dish) antennae, since they offer the only practical option for indoor installation. They are also easier to transport and cope better in strong winds. The antennae are typically mounted on base stations and cost between $30 and $250 each.
On 31 July, MWE announced its interim results: it had achieved revenues of $7.3m (up 36% organically from 2005), delivering a gross margin of 44.3%. Basic earnings per share rose 30% to 3.1¢ (or 1.7p). The board announced that the group intended to pay a dividend (of around 0.9p) at the end of the year and that they had a “positive outlook for the remainder of 2006 with a healthy order book and sales pipeline”.
House broker Corporate Synergy expects sales to increase
from $11.7m in 2005 to $17m and $23m respectively over the next two years. Earnings per share for 2007 is predicted to be 3.8p, thus putting the shares on a lowly p/e ratio of 13. The balance sheet is strong, with $12m (or 11.5p per share) of net cash at the end of June. Finally, MWE is also a supplier of antennae for the Radio Frequency Identification (RFID) market. which is expected to grow rapidly over the coming years via applications such as stock control and security
So what do we need to watch out for? Being a small Israeli company operating in a global market, there is not only political risk, but also the danger that MWE will not have sufficient scale to remain competitive in its niche field.
However, a substantial portion of the company’s technology is developed from sophisticated military applications, which somewhat mitigates these risk factors. Additionally, MWE is already operating on a mass production basis and is therefore cost competitive.
In all, MWE is a rapidly growing, science-rich, high-growth company, which is attractively valued. Thus, even though it is high risk, I would recommend that the more speculative investor buy the shares as part of a well-diversified portfolio.
Recommendation: SPECULATIVE BUY at 48p (market cap £25m)