Calnex IPO: a small stock with big prospects

• Scottish firm Calnex is planning to go public in early October at a valuation of £42 million, making it one of the smallest listings of the year.
• The company hopes to capitalise on the roll-out of 5G, which will drive more demand for its testing equipment that is already widely used by the telecoms industry.
• Calnex is already profitable and cash generative, and aims to grow both organically and through acquisitions.
• Calnex is broadening its customer base to outside the telecoms industry and into other fast-growing segments like cloud computing and data storage.

Calnex designs and manufactures equipment and software that allows telecoms companies to test critical infrastructure within their networks to ensure they meet industry standards and work efficiently. It also provides emulation products that helps them test new equipment during the design phase to ensure it is fit for purpose.

The Scottish-based company was founded in 2006 and has grown into a global business. It has additional offices in Northern Ireland and the US, as well as sales teams situated in China and India. Still, it has sold products to over 600 different companies in 68 countries since launch, supported by a slew of distribution partners around the world such as Spirent and CN Rood.

Its customer list is nothing short of impressive. It supplies the big three suppliers of telecoms equipment in Europe – Huawei, Ericsson and Nokia – and major US firms like CISCO. Its products are also used by mobile carriers like BT Group, Vodafone, Telefonica, AT&T, Verizon and Comcast, and semiconductor companies like Qualcomm, Intel, Broadcom, Raytheon and Broadcom.

It also sells to huge companies that manage large amounts of data such as Apple, Alphabet, Facebook, Microsoft and Tik Tok-owner ByteDance. It previously focused solely on the telecoms industry but has gradually started to serve other firms involved in the likes of cloud-computing and data storage. The telecoms industry still accounts for the vast majority of revenue but other industries account for about 14% of revenue.

Is Calnex profitable?

Having steadily grown over the last 16 years, Calnex is going public as a ‘profitable and cash generative’ business. Calnex says revenue has grown at a Compound Annual Growth Rate (CAGR) of 16% since the 2015 financial year and that it has a ‘record order backlog’ that stretches into 2021, accompanied by a ‘strong sales pipeline’.

A filing with Companies House in September shows Calnex’s annual revenue rose 32% to £13.7 million in the year to the end of March 2020 from £10.3 million, accelerating from the 21% annual growth delivered the year before. It also showed Calnex made an underlying pretax profit of £2.76 million in the 2020 financial year, up from £2.38 million the year before, with reported pretax profit falling to £1.71 million from £2.38 million.

It is worth noting that Calnex reports in sterling but 85% of orders are made in dollars, which means GBP/USD can have a material impact on its earnings.

Although Calnex has a large pool of customers, it currently makes over 50% of its revenue from its ten largest customers, which, on average, have been placing repeat orders from Calnex for nine years – demonstrating long and sustainable relationships with some of the biggest companies on the planet. This is further supported by the fact over 80% of all its revenue over in the last three years has come from repeat customers.

Calnex IPO: how much will it raise and at what valuation?

Calnex is intending to list on AIM by conducting a placing of both new and existing shares. This will result in just under 46.9 million shares being issued at 48 pence each, which will raise £6 million for the business and £16.5 million for existing investors.

It will start life as a publicly-listed business with 87.5 million shares in issue in total, giving it a free float of 43%, and with a valuation of £42 million.

Calnex shares will begin trading upon the open of trade on Monday 5 October.

Why is Calnex launching an IPO?

The coronavirus has weighed on London’s initial public offering (IPO) market this year, injecting uncertainty and disruption that has encouraged many companies to delay or cancel their listing plans.

Calnex’s IPO will be one of the smallest during a subdued year, but the company believes the telecoms market is undergoing extreme change as 5G is introduced, which in turn will unleash everything from more smart devices to autonomous cars. Calnex has already proven it is a vital, long-term partner to the industry and now it wants to raise the cash and profile of the business so it can capitalise on new opportunities. Calnex says the telecoms test and measurement market is forecast to grow at CAGR of 11.5% from 2020 to 2024.

5G networks operate on significantly higher radio frequency bands than existing 4G networks, which means information can’t be transmitted as far. This requires significantly more infrastructure to be deployed in order for 5G networks to work, and more infrastructure means more testing, playing into Calnex’s hands.

This is the same for all the technologies that will follow, like self-driving cars and the Internet of Things (IoT), all of which will also need more equipment to be deployed and drive demand for testing equipment (which should broaden Calnex’s customer base further). The company says it already has products ‘ready to meet the early requirements of 5G market participants’ and capable of evolving its existing products to meet future requirements.

The fact it has long relationships with the world’s largest telecoms companies means it is able to understand what products and services the industry needs going forward and base its research and development (R&D) around it, and it hopes to be the first to market and help set the new industry standards that will be developed over the coming years.

Calnex says its products stand -out against competitors because of the ‘high specifications and the complexity of the product platforms’. For example, Calnex says international standards now require certain test equipment to measure with the precision of less than 0.000000001 of a second.

Calnex says the £6 million it will raise through the IPO will be combined with existing cash resources and used to repay debt, invest in R&D and allow it to look for acquisition opportunities to fuel growth. A filing with Companies House in September said Calnex had around £3.6 million in cash at the end of March 2020, with net assets of £6.6 million.

The company has already made a number of bolt-on acquisitions over the years, including that of Northern Ireland’s JAR Technologies that expanded its emulation product portfolio and Germany’s Luceo Technologies that makes testers for high-speed components.

The other main reason Calnex is launching an IPO is so existing shareholders can cash -in part of their investments. The fact shareholders are raising nearly three times as much as the company implies investors are keen to monetise some of their shares and get a firm valuation for their remaining stakes.

How to trade the Calnex IPO

With IG, you will be able to trade Calnex shares as soon as they start trading on the first day of dealings. This will allow you to take a position as to whether you believe the share price will fall or rise from the IPO price.

You can trade on the UK’s best trading platform and back whether you think shares will rise or fall in value. Go long (buy) if you think they will increase in value, or go short (sell) if you think they will decrease in value.

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How does the Calnex IPO compare to other AIM listings?

Calnex will be one of only a handful of companies to bite the bullet and list on AIM this year – with just five companies having joined so far. Still, Calnex will be the second-smallest IPO in terms of valuation, and by far the smallest in terms of the money it plans to raise.

The newest additions to AIM have largely put in a solid performance since listing, despite the tumultuous environment for markets. All of them are trading higher as of 22 September compared to their IPO price, apart from Barkby Group, the first AIM IPO of the year, which has fallen 30%. Still, FRP Advisory is the only one to have seen a significant rise in its share price, trading 45% higher, with the others all booking single-digit gains

Calnex IPO: a profitable business with strong prospects

Calnex will revive the AIM IPO market when it lists in early October and, although it will be one of the smaller IPOs of the year, the company comes to market as a profitable business that is well established in its marketindustry. Having said that, it is a small fish in a very big pond, competing against other, often much larger firms, but it has already demonstrated its ability to hold its own in the market as it has already formed strong relationships with some of the world’s biggest telecoms and data companies.

Read more: What are the top UK 5G stocks to watch?

Testing is not an optional activity for most of its customers because they must ensure their critical equipment functions properly and the fact the world will need considerably more infrastructure to unleash 5G and other technologies means more testing will be needed.

This will be the primary driver of growth for the company, so the speed at which it is introduced will be key for the business. There has already been questions over how quickly telecoms companies can bring us faster speeds and connectivity, especially after the US, UK and others banned Chinese outfit Huawei – the largest supplier of telecoms equipment in the world - from their 5G networks. Calnex counts many Chinese companies in its client list, including Huawei and ZTE, but the immediate threat should be minimal considering it doesn’t supply components.

Some may question whether it is raising enough cash to fully capitalise on the situation considering it is only tapping investors for £6 million in fresh equity, but it is already cash generative and proven it can deliver substantial growth. Still, as is usually the case with most AIM stocks, investors should be wary that they could be diluted by any further fundraisings down the line.