Smaller Companies: Lights turn to green for CML

CML Microsystems makes electronic components for communications and traffic controls, writes Richard Phillips. Interim figures, just out, show a respectable improvement in sales, up 12 per cent to pounds 9.38m.

Pre-tax profit, however, rose 173 per cent to pounds 319,000. EPS was up 45 per cent, to 1.96p. Traffic activities actually made a pounds 400,000 loss, but that is normal for first-half results at the company, due to the spending patterns of local authorities. The main reason for the turnaround in fortunes at the pre-tax level was the removal of operating losses of pounds 79,000, before interest received of pounds 196,000.

One of the things to emerge most clearly from the figures is the difference that CML's cash pile of pounds 7.5m makes, providing an important cushion against fluctuations in its markets.

Some of that cash will go on expanding the group's semiconductor manufacturing facility. A 12-month project, it is estimated it will cost up to pounds 3m, but should boost manufacturing capacity by 20 to 25 per cent.

Over the last year, the company's shares have had a good run, outperforming the market by 15 per cent.

Forecasts by house broker Beeson Gregory see pre-tax profit rise to pounds 2.5m in 1998, from pounds 1.9m in 1997, and pounds 3m in 1999. That leaves the shares trading on 14.6 times earnings next year, and 12.2 times 1999's earnings.

That does not seem too undemanding, and the company has the benefit of good cash flow, and a cash pile to protect against turbulence.

The semi-conductor technology CML possesses is in a booming market - telecom applications and the like. Private mobile radio is also contributing strongly, and looks set for further good growth. On a medium-to-long-term view, the shares look a sensible investment. Gains are unlikely to be the spectacular ones sometimes associated with high-tech, but nor are they likely to be of the boom-to-bust variety. Finally, assuming the technology continues to improve, CML may well catch the eye of a larger competitor one day.