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Building on momentum
MTI Wireless Edge Limited (LON:MWE) is a world leader in developing and manufacturing high quality and cost effective antenna solutions for commercial and military applications, as well as control systems for remotely operated smart irrigation systems. The company has achieved strong growth in recent years, with a three-year revenue compounded annualises growth rate (CAGR) of 22% and an earnings per share (EPS) CAGR of 70%. These dynamics have supported a share price increase of 170% over the three years.
MTI Wireless Edge (LON:MWE) is headquartered in Israel and has a long-standing association with Tel Aviv-listed MTI Computers (MTCO.TA), with MTCO currently holding a 53% equity stake in MTI Wireless. On May 2, 2018, MTI Wireless announced that a merger agreement had been signed between the two companies. The assets of MTCO will be merged into the London-listed MTI Wireless, via the issue of new MTI Wireless shares.
The combined entity will have four revenue streams, each of which is profitable and with favourable growth dynamics. We present a brief overview of these on p2. We argue that the combined group has a well-balanced revenue profile, with continued growth prospects and a solid financial base. Furthermore, we believe that the increased market capitalisation of MTI Wireless following the merger should bring the company “onto the radar screen” for more investors, which could lead to a re-rating in valuation terms.
In order to present a clearer understanding of the financial metrics of the combined entity, we provide below some pro-forma (pf) figures, meaning financial data for 2017 and 2018 is presented as though a full 12 months of MTCO (and its additional share count) applies. In reality, we believe the deal is likely to close intra-year during 2018. The pro-forma 2018 figures give us a useful baseline for forecasting 2019.
We argue that a prospective 2019e price/earnings (P/E) multiple of 8.9x represents a modest valuation for a company with MTI Wireless’s ongoing growth potential and sound financial position.
The chart above left shows the pro-forma 2017 revenues of a combined MTI Wireless / MTI Computers.
The Antennas division designs and manufactures antennas for civil and military markets. These include antennas for wireless networks, as well as radio frequency antennas for specialist applications such as product ID. A major current growth driver is in back-haul point-to-point wireless network infrastructure, as network operators prepare for next generation applications.
The Controllers division provides electronic wireless control systems for smart irrigation. These are used in agriculture, and also by municipalities in irrigating public spaces. Water conservation concerns are driving growth in this industry worldwide. The chart below shows the growth in the market for smart irrigation devices, including the controllers segment applicable to MTI Wireless. We expect this segment to grow in line with the industry’s products growth rate of 17% a year.
The Representation business provides facilitation services for international businesses operating in Israel, particularly in electronics and communications industries.
The Aerostat business is a systems integrator for lighter-than-air platforms (balloons and airships) used by governmental organisations for intelligence purposes. Customers include Israeli agencies and export markets.
We believe that all four divisions of the newly combined group will be positive contributors to growth going forward (chart above right), with an average organic growth trend of 10% a year (our estimate).
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