Bargain hunting in the market carnage

Bargain hunting in the market carnage

  • Full-year operating profit up 8.5 per cent higher to $4.43mn on 5.6 per cent higher revenue of $43.2mn
  • EPS rise 6 per cent to 4.07¢ (3.06p)
  • Net cash up a third to $12.5mn, buoyed by 65 per cent higher cash flow from operations of $6.6mn
  • Final dividend raised 12 per cent to 2.8¢ (2.1p)

This year’s 37 per cent pullback in the share price of Israeli-based technology group MTI Wireless Edge (MWE: 48p) partly reflects the carnage in the tech sector, but sentiment has also been impacted by an earnings miss.

Analysts had been expecting the company to report $4.9mn of pre-tax profit in 2021 when I covered the third-quarter results (‘Climate change and 5G winner’, 15 November 2021). But last autumn’s strength of the shekel against the US dollar not only led to higher staff costs, but resulted in a hefty non-cash foreign exchange loss on translation of financial liabilities, too. Annual operating profit still increased almost 9 per cent to $4.43mn, but pre-tax profit was flat at $4.04mn. The US dollar has since surged from ILS3.11 to ILS3.29 since the start of 2022, thus reversing these pressures.

Rightly, the board are exiting their operations in Russia following that country’s invasion of Ukraine, the consequence of which is that joint house broker Allenby Capital reined back its 2022 pre-tax profit estimate by 9 per cent to $4.55mn based on revenue rising 8 per cent to $46.5mn. This means that net of $12.5mn (10.7pa share) cash on the balance sheet, the shares are priced on a modest 12 times earnings, an attractive entry point that is well underpinned by strong fundamentals in all the group’s businesses.

For example, MTI’s antenna division is feeding off growing demand for 5G network backhaul antenna systems (accounting for 20 per cent of divisional sales) and military antenna (30 per cent of sales). MTI has just received a trial order, from a Tier 1 OEM vendor for its new automatic beam steering 5G antenna. The technology ensures that the antenna automatically adapts to any small movements or vibrations caused by different climate conditions, including wind or temperature, to maintain a stable signal.

The global wireless backhaul market is dominated by seven key OEM vendors which supply radio equipment to the main cellular network operators and support the roll-out of 5G infrastructure. MTI is now working with five of them, and chief executive Moni Borsovitz says that MTI is now in discussions with more potential customers. Although still only a small part of the overall group, accounting for 6.4 per cent of total operating profit, Borsovitz expects the antenna business to report robust growth this year.

He also outlined strong drivers for MTI’s wireless water management systems division, which reported a 7 per cent rise in annual operating profit to $2.1mn on revenue of $17.6mn. MTI has just announced a partnership with Viridix, a specialist in actionable data analytics for irrigation that measures the water available to the roots of crops. The technology is being integrated with Mottech’s real-time irrigation monitoring, control and reporting software, so that customers can monitor crop root activity and implement an irrigation protocol across farms in real time. The sensors only cost farmers a few hundred dollars per hectare, but can reduce water usage by more than a quarter. It is likely to prove a lucrative recurring revenue stream.

MTI’s Summit electronics division, which represents 40 international suppliers of radio frequency/microwave components, increased operating profit by 15 per cent to $1.85mn last year, buoyed by high levels of government spending on defense. That’s not going to change anytime soon.

I initiated coverage on the shares when they were priced at 40p (Alpha Report: ‘Tapping into 5G and climate change technologies’, 4 September 2020), and the price doubled in value. Underpinned by a prospective dividend yield of 4.9 per cent, and trading on a cash-adjusted price/earnings (PE) ratio of 12, the shares are priced for a profitable outcome. Buy.

Indexed linked for growth

  • 100 per cent of rent collected in 2021 calendar year
  • Interim net asset value (NAV) per share rises from 84.7p to 90.4p
  • 92.6 per cent of income subject to index-linked leases
  • Target to deliver 5.5pa share fully covered dividend by September 2022

Alternative Income Reit’s (AIRE:73p) Half-year results highlight a company with a high-quality tenant base and one that provides investors with a rock-solid secure income stream from a diversified portfolio of 18 commercial freehold and long leasehold properties.

The lowly geared portfolio has a current passing rent of £6.6m which easily covers the £1.4mn annual finance charge on the company’s £41mn loan facility, thus enabling the board to pay out excess funds to shareholders. It’s a rising income stream, too, hence why the directors expect to hit their 5.5pa share targeted dividend by September 2022.

The inflationary environment is highly supportive of the investment case. Economists are predicting that the UK consumer price index could hit 8 per cent in the coming months, and stay at an elevated level for some time to come. That’s especially good news for Alternative Income Reit as over 92 per cent of tenant’s leases are subject to index-linked rent reviews. In the past six months, rent reviews lifted income on four properties by 3.5 per cent.

A rising and secure rental income profile – the weighted average unexpired lease term is over 18 years – not only underpins the portfolio’s EPRA net initial yield of 5.72 per cent, but 22 per cent of the portfolio is invested in industrial property, a segment of the market that is seeing strong rental and capital growth.

Although Alternative Income Reit has paid out 12.74pa share of dividends since I first suggested buying at the current price (‘Alpha Research: A deep value, high-yielding property play’, 25 October 2019), and is producing valuation uplifts, the shares are priced an unwarranted 20 per cent discount to NAV and offer an enticing 7.5 per cent prospective dividend yield. Buy.

A copper bottomed investment

  • Tangible net asset value (NAV) rises 13 per cent to £38.8mn (22.9p per share) in six months to 31 December 2021
  • Half-year pre-tax profit of £4.2mn buoyed by £8.1mn of portfolio gains
  • Valuation of net smelter royalty (NSR) over Sandfire Resources’ A4 copper project raised from £3.8mn to £9.3mn

Metal Tiger (MTR:18p), an Aim-traded investment company primarily focused on undervalued natural resources, has reported a 144 per cent uplift in the valuation of its net smelter royalty (NSR) over Sandfire Resources’ (ASX:SFR) A4 exploration project in the Kalahari Copper Belt, Botswana.

At the end of last year, the A$2.4bn market capitalization Australian Stock Exchange-listed group reported an upgraded A4 ore reserve declaration of 9.7mn tons at 1.2 per cent copper and 18g per tonne silver with 114,000 tons of contained copper and 5.7mn ounces of contained silver. In addition, a pre-feasibility study for an expanded 5.2m tons per year mining operation combining Sandfire’s T3 Copper-Silver and A4 projects produces a post-tax net present value of $682m, the massive uplift in Metal Tiger’s NSR to £9.3 mn.

Furthermore, analysts’ estimate that royalties from A4 could be worth US$8.9m (£6.7m) per annum to Metal Tiger (at an annual production rate of 3.2m tons and based on a copper price of $9,300 per tonne, or 10 per cent below the spot price). That represents a material sum for a £30m market capitalisation company. As Sandfire ramps up the project then expect further material upside to the valuation of Metal Tiger’s A4 NSR as well as the UK company’s holding of 7.8mn shares in Sandfire that are currently worth A$46mn (£25.7mn).

There are multiple other targets subject to an uncapped NSR over the 8,000km2 of Sandfire’s adjacent license holdings, too. These include Sandfire’s A1 Deposit, located 25km from the A4 Deposit, which contains 2.5m tons at a grade of 1.8 per copper and 45g per tonne of silver. It’s realistic for some of them to be developed, thus providing another uplift to NAV. Global demand for copper is certainly well underpinned as the world transitions to green energy as I have previously highlighted (‘Bargain shares: Playing the commodities super cycle’, 5 August 2021).

Metal Tiger’s shares have produced a 52 per cent gain since I included them in my 2020 Bargain Shares Portfolio and are priced on half analysts’ sum-of-the-parts valuations. Buy.

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