Calnex Solutions plc (CLX) — Investment Research Note

Executive summary

Calnex designs proprietary test & measurement instruments for network synchronisation, monitoring and emulation, selling into telecoms (its heritage), cloud/datacentre (now the largest end-market by orders) and US government & defence; key products include Paragon (lab sync), Sentinel/Sentry (network sync), SNE/NE‑ONE (network emulation) and the recently launched SyncSense. Revenue and profit peaked in FY23 (£27.4m / £7.2m PBT) before a telecoms-capex downturn cut FY24 revenue to £16.3m and tipped the group into a small loss, with recovery now underway — FY25 £18.4m / £0.7m PBT, FY26 ~£21.9m and "improved profitability" 2026-04-13 trading update. The most important point for valuation today is the operating leverage embedded in a 75%+ gross-margin business with a largely fixed cost base: at mid-cycle revenue this is a £5–8m underlying-EBITDA business with a £37m enterprise value.

Fair value estimate

Methodology: blended forward-PE on FY28 normalised earnings (the company's own commentary points to "accelerated growth in FY28" once SNE, Paragon Neo-S and 1.6Tb/s launches are commercialised) sense-checked against EV/sales and EV/underlying EBITDA on FY26 actuals.

Key assumptions:

• FY28 revenue £26–30m (back to FY23 levels but with broader product mix); underlying EBITDA margin recovers to 22–28% (vs 29% in FY23, 6% in FY25)
• FY28 PBT £4–6m; EPS 4–6p
• Exit multiple 14–18x P/E (small-cap UK tech median; below specialist-instruments peers because of cyclical/customer-concentration risk)
• Discount to PV at 10% over 2 years

Fair value range: 55–85p per share, mid ≈70p Implied market cap range: £48–75m, mid ≈£62m Current market cap £46.6m / ≈53p. Absolute upside to mid: ~30% (range -5% to +60%).

The downside is reasonably protected: £9.3m net cash, no debt, c.£12m intangibles (capitalised R&D), and dividend maintained through the trough — i.e. the equity has hard-asset/cash backing of ~25–30% of current market cap before any business value.

Sector context

ICB Telecommunications classification is technically correct, but Calnex behaves more like a specialist electronic test & measurement company (closer to Spirent Communications [acquired by Viavi 2024–25], Viavi Solutions, EXFO, Keysight) than a network operator. Its quality (75% gross margin, net cash, mid-cycle 25%+ EBITDA margins) is well above typical telco peers and broadly in line with specialist instrumentation peers, though at a much smaller scale (£22m revenue vs >£500m for Viavi). Listed peers: Viavi Solutions (NASDAQ: VIAV), Keysight (NYSE: KEYS), and historically Spirent (now part of Viavi).

Investment thesis

• Real (if early) AI-receiver exposure with operating leverage at scale. Sentry secured a "significant" hyperscaler order in FY22, repeat hyperscaler orders confirmed in H1 FY26, SNE is positioned as a network emulator for AI infrastructure with revenue generation expected late FY27, and the 1.6Tb/s synchronisation product is in pre-order discussions for FY28 2025-11-18 interims; 2026-04-13 trading update. Hyperscaler/cloud orders became the largest end-market segment in FY25 (43% of orders, up from 39% FY24) 2025-05-20 final results.
• Fair price relative to mid-cycle earning power. FY23 demonstrated the model can do £7.2m PBT on £27.4m revenue; current market cap is £46.6m — i.e. ~6× cyclical-peak PBT — without crediting the new products or the FY28 acceleration. Net-cash balance sheet (£9.3m, plus £3m receivables expected early FY27) means EV is just £37m 2026-04-13 trading update.
• Diversification and product launches are reducing telecoms dependence. Government & defence (US federal) is a new growth vertical with senior US-based hires, partner-lab installations and committed channel investment; VIAVI partnership (Nov 2025) opens O-RAN cross-sell. Three concurrent next-gen product programmes (Paragon Neo-S 800Gb/s shipping; 1.6Tb/s targeted FY28; SNE-AI in discovery) provide multiple shots on goal 2025-11-18 interims; 2025-08-14 AGM statement.

Key risks

• Long, lumpy hyperscaler/defence sales cycles and customer concentration. FY25 one customer = 17% of revenue; defence orders are "difficult to predict, making order visibility challenging" by management's own admission 2025-11-18 interims. A single delayed hyperscaler order can move quarterly numbers materially in a £22m business.
• Telecoms recovery has repeatedly been pushed out. FY24 revenue fell 41% as customers paused capex; commentary has shifted from "early signs of recovery" (May 2025) to "stable" (Nov 2025), and the company is no longer relying on telecoms recovery for growth — meaning the FY28 acceleration thesis rests almost entirely on new-product / new-market execution.
• R&D capitalisation flatters underlying EBITDA. £4.8m of R&D was capitalised in FY25 vs £1.2m underlying EBITDA; statutory operating profit was just £0.4m. If product launches underperform, intangible impairments would follow — £0.2m was already impaired in FY25 2025-05-20 final results.

Operating leverage

This is a textbook high-operating-leverage profile. Gross margin is 75–76% with cost of sales effectively flat (£1.9m H1 FY25 = £1.9m H1 FY26 despite +9% revenue) 2025-11-18 interims. The fixed cost base is c.£10m administrative expenses + £4.3m R&D amortisation, against which revenue scales. Empirically: from FY25's £18.4m revenue and £0.7m PBT to FY23's £27.4m revenue and £7.2m PBT, every incremental £ of revenue dropped through at 72% to PBT. A 10–20% revenue beat on the FY26 base (£21.9m) — i.e. £2.2–4.4m of extra revenue — would plausibly add £1.5–3.0m to PBT, multiplying current profits 2–4×. The headcount has been roughly flat (155–157) for two years through the downturn, meaning future revenue can be absorbed without proportional staffing additions 2025-05-20 final results; 2025-11-18 interims. Inflection points to watch: SNE-AI commercialisation in late FY27, Paragon Neo-S 1.6Tb/s launch in FY28, and US Federal contract wins.

Value-trap signals

None of the classic ones identified. The dividend has been held flat (0.93p total) through the trough, the balance sheet is net cash, there are no related-party concerns, no accounting restatements, no debt covenants, and end-markets are growing structurally. The main "value-trap-adjacent" signals are: (i) statutory operating profit much lower than underlying EBITDA due to R&D capitalisation; (ii) ~70% of revenue still flows through the (now-terminated) Spirent/Viavi channel relationship, with a transition in progress; and (iii) revenue has not yet exceeded the FY23 peak — i.e. the bull case is reversion, not a new high.

Earnings vs. expectations

FY23 (May 2023): met market expectations; Trading Update (Mar 2023) flagged FY23 would be "in line" and final result delivered 25% revenue growth. FY24 (May 2024): profit warning issued Oct 2023; revenue ultimately £16.3m vs original expectations — significant miss. FY25 (May 2025): met revised expectations (12% growth flagged in April 2025 update; in line with consensus). H1 FY26 (Nov 2025): in line; FY26 final (April 2026) "slightly ahead of market expectations". Pattern: one large miss (FY24, telecoms downturn), followed by a careful reset and consistent in-line/slight beats since.

Conviction

3 — moderate.

• Anchoring this rating: clean, audited accounts with unqualified opinions; consistent disclosure across the cycle; a high-margin business model whose mid-cycle economics are well-evidenced by FY23; tangible net cash supporting a meaningful share of market cap.
• Limiting this rating: ~half the fair-value case depends on FY28 product launches (SNE-AI, 1.6Tb/s) that have not yet generated revenue, and the company is small enough that one major order swings annual results materially.