I must start with an apology. I’ve been holding off on writing about Telit Communications for a while. No excuses. Simply procrastination. Telit’s fundamentals look good and the share price has enjoyed strong growth over the last 12 months. In my opinion, it is very much worth a mention in our growth stocks feature.
The reason for the delay you ask? Well, the honest answer is that I’ve not managed to get my head around what they offer, exactly. Something to do with the Internet of Things, I’m told. It sounds a bit broad to me – and I’m sorry if you know what this is – but I don’t, or didn’t prior to writing this piece. How could I write an objective review of a business – when I don’t understand what it is they actually do?
So, with some gentle prodding by the Editor, I rolled up my sleeves and got reading.
Now, if you’re smarter than me – which, if I’m being honest here, wouldn’t make you a mastermind – and you know what the Internet of Things is, you might want to skip this next paragraph or so and get straight to the fundamentals. That’s the bit you’ll be more interested in.
If you’re in the position I was in and have no real idea what it all means, stick with me. It’s certainly something you ought to know about.
So what is the Internet of Things or IoT?
With a very broad brush, Google sums it up pretty well – “It’s the interconnection via the Internet of computing devices embedded in everyday objects, enabling them to send and receive data.”
IoT is connected to many of the applications that we use both in the home and in industry. This includes cars, mobile phones, heating, washing machines, headphones, lamps, wearable devices and many other everyday technologies. For industry, IoT can be applied to things like transportation networks, ‘smart offices’, help us reduce waste and improve efficiency for utilities such as water and energy.
IoT is enabling us to understand and improve the way in which we work and live. And it’s only going to become more important as we move to more integrated technological solutions.
So, how does Telit Communications fit in to this? Well, they provide IoT products and services to a wide range of sectors that includes Automotive, Agriculture, Retail, Healthcare, Transportation, Oil & Gas, Facilities Management and Manufacturing. This may be in the form of electronic components, connectivity and cloud storage and tools, alongside their consultancy services that are designed to work with businesses to implement IoT-enabled solutions.
Telit Communications – The Fundamentals
Now we are a little clearer on what they do, let’s move on to the P&L.
Revenue has grown consistently each year over the last 5 years while pre-tax profit has done the same, up from £11m in 2015 to £14.7m in 2016. Adjusted earnings per share have grown from 8.22p p/s in 2015 to 10.8p in 2016. A dividend was introduced too, in 2016 at 5.9p per share.
Another trend that I like to see in a growth stock is positive share price growth. Momentum is important and Telit have recorded solid growth over 1 month, 3 month, 6 month and 12 month periods.
Graph source: Hargreaves Lansdown
Telit’s range of Internet of Things products and services are available worldwide meaning there are revenue streams globally. The Americas account for 40% of revenue, Europe, Middle East, Africa 37% and the Asia Pacific region 23%. Their industry and network partners are impressive too. Telit enjoys technology partnerships with the likes of IBM, CISCO, Intel, ORACLE and SIEMENS.
Gearing is a little high when comparing Telit Communications against its peers but the business can comfortably afford it’s interest payments while the short term liabilities ratio’s (quick ratio and current ratio) suggest the business is covered. Return on Capital Employed or ROCE is proving efficient at 31.8% while margin’s are healthy at 6% which indicates that management are getting the best out of their borrowings, while enjoying cheap rates of interest.
It’s worth noting the Directors have been backing the business over the last 12 months with purchases. The wonderfully named CEO, Oozie Cats, purchased £30k of shares at the end of March at a price of 319p per share while both he and Chairman Enrico Testa purchased over £200k worth of stock each in September 2016.
Room for share price growth?
There are three brokers publishing their forecasts for Telit – Berenberg, Canaccord Genuity and RBC Capital Markets. Each is indicating a buy recommendation, with the latter forecasting a strong buy. However, you should bear in mind that it’s not a big pool from which to take a consensus and Berenberg are advisers to the business, so there’s likely to be a conflict of interest.
Pre-tax profit is forecast to grow in 2017 and 2018 to £25.5m and £34.3m respectively, which gives them a forward PEG ratio of 0.33, which indicates plenty of room for share price growth. The forward P/E ratio is sitting at 17.3, again, indicating opportunities for growth.
A positive outlook
In May, the business placed over 11 million shares raising £39m. This cash generation has been undertaken in order to fund several identified acquisition opportunities, mainly in the IoT Services sector, which, they claim, will look to execute in the near to medium term. Watch this space…
I’ll leave you with the outlook statement from CEO, Oozie Cats, on 19th April
“We have a full scope of communications technologies in order to provide the comprehensive end to end IoT solutions that our multinational customers require. “The IoT market is rapidly gaining momentum across an increasing number of industrial enterprises – large and small – around the world.
“With our wide range partners and our unique end to end IoT solution capabilities, we are very well positioned to address the numerous opportunities.”
So, there’s my case for Telit Communications PLC to enter our growth stock feature. If you have any thoughts, or questions, on this or any other of my other growth stock reviews, feel free to visit the Growth Stocks forum and have your say.
Do bear in mind this isn’t a recommendation to buy this stock. The above constitutes my opinion based on the research undertaken. I urge you to do your own research before you invest.
Other featured Growth Stocks
- NMC Health PLC [NMC]
- Burford Holding PLC [BUR]
- Vectura Group PLC [VEC]
- Treatt PLC [TET]
- Crest Nicholson Holdings [CRST]
My thanks as always to JD Financial Publishing for providing access to the Company REFS research tool. They are currently offering a 30-day free trial to this fantastic product and I would recommend you take a look.