Strong base helps Calnex Solutions cope with short-term downturn

Telecoms testing instrumentation supplier Calnex Solutions (LON: CLX) has been hit by a reduction in spending by the telecoms companies. They remain cautious, so there is no indication of a short-term recovery. Calnex Solutions is financially secure and there is underlying demand for its technology.

Calnex Solutions designs and manufactures equipment used by telecoms network operators, network providers and systems suppliers to test their products. It has broadened its customer base to include data centres, where demand is still strong, and defence.

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Non-telecoms revenues make up one-quarter of total revenues. There is no pressure on pricing and the international nature of the business means that it is not dependent on any individual country. The Americas have been most impacted by the slow down of spending.

In the six months to September 2023, revenues slumped from £12.7m to £7.8m and the company moved from a pre-tax profit of £3.1m to a loss of £600,000. Trading did not pick up in September as is normally the case.

The cost base is being kept steady in expectation of a recovery, even though that may not be until the next financial year.

The strong balance sheet means that short-term dips are not a problem even though there was a large cash outflow during the period. There is still £13.5m in the bank and there is unlikely to be any significant outflow in the second half.

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Management continues to invest in product development for existing and new markets. There could also be add-on acquisitions of new product areas if the opportunities arise.

Calnex Solutions raised £5m after expenses at 48p a share when it joined AIM three years ago. Trading was initially much stronger than expected. The share price briefly fell below the original placing price but has recovered to 66p.

Cavendish expects breakeven for the full year, compared with a pre-tax profit of £7.2m last year, on revenues of £17m, which are lower than in 2020-21. The continuing uncertainty means there is no forecast for 2024-25.

While the timing of any recovery is difficult to predict, Calnex Solutions still has the same long-term prospects with investment in 5G and data centres continuing for the foreseeable future.

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