CML Microsystems Plc (AIM: CML) — Investment research note

Executive summary

CML designs and markets mixed-signal, RF and microwave semiconductors for industrial wireless communications — land mobile radio, IIoT, satellite ground equipment, mmWave 5G infrastructure, defence and, more recently, Digital Radio Mondiale broadcast. Across the past five years the Group has been transformed: storage division divested for $49m (Feb 2021), microwave/mmWave capability built organically via "SµRF" and through the MwT acquisition (Oct 2023), with revenue rising from £13m (FY21 continuing) to £22.9m (FY25), but operating margins eroded by integration costs, customer destocking and R&D-led restructuring (FY26 H1 pre-exceptional operating loss of £0.98m on revenue of £9.2m). The single most important point for valuation is that the equity is trading at a discount to tangible net assets with £11m of net cash, on a depressed cyclical-trough earnings base — a recovery to mid-cycle EBITDA of ~£5m would not require heroic assumptions.

Fair value estimate

Range: 230p – 310p per share; implied market cap £37m – £49m. Midpoint ~270p / £43m, ~9% upside from current £39.6m.

Methodology — blended. Three cross-checks:

• Mid-cycle EV/EBITDA: pre-exceptional EBITDA was £4.3m–£5.9m across FY22–FY25 2025-06 full-year, 2024-07 full-year. Through-cycle EBITDA of £4.5m at 6–8x = EV £27m–£36m, +£11m net cash = £38m–£47m mcap.
• Sum-of-parts / NAV: Net assets at H1 FY26 of £49.4m 2025-11 half-year, of which £12.2m is goodwill (mostly MwT) and £2.4m other intangibles. Tangible NAV ≈ £35m; including the goodwill the asset backing is comfortably at or above the share price.
• EV/Sales: 1.0–1.5x normalised £22m revenue = EV £22m–£33m, mcap £33m–£44m.

The £39.6m market cap sits in the lower half of all three approaches — the market is pricing CML close to the bottom of a fair-to-cheap range.

Sector context

ICB Technology / Semiconductors — confirmed. CML is a small-cap specialist with a quality profile below dominant peers (Diploma, Halma, Spirent) but with a balance sheet better than typical loss-making AIM semis: no debt, £11m net cash, ~21% of market cap. Closest listed analogues: CEVA Inc. (US RF IP), IQE plc (compound semi epi-wafers, UK), Filtronic (UK mmWave). CML differs in being end-product (chip) rather than process-stage focused, with strong gross margins (67–71%) but sub-scale revenue.

Investment thesis

• Trough valuation with asset-backed downside. Market cap £39.6m vs net cash £11m, net assets £49.4m; £7m surplus land disposals at Oval Park completed FY26, with revaluation gain on remaining property 2026-04 trading. The cash position post-disposal underpins a meaningful share of the current price.
• Cyclical recovery underway with revenue momentum. H2 FY26 revenue grew ~18% sequentially vs H1, FY26 full-year revenue expected >£20m. Supply-chain issues affecting SµRF products are being resolved and shipments resuming late FY26 2026-04 trading, 2025-11 half-year. A 12-year, $30m+ GNSS design-and-supply contract signed July 2025 provides multi-year visibility from FY28 onwards 2025-11 half-year.
• Real, if specialised, exposure to the comms-semi buildout. mmWave power amplifiers (GaN/GaAs from MwT) target 5G small cells, fixed wireless access and commercial satellite communication terminals — markets the company calls a ~$1bn addressable opportunity 2024-07 full-year. While not pure-AI, this is genuine picks-and-shovels exposure to data infrastructure expansion.

Key risks

• Sub-scale operating losses persist. H1 FY26 pre-exceptional operating loss £0.98m and an expected H2 operating loss albeit improved 2026-04 trading. Capitalised development costs of £17.9m on the balance sheet 2025-11 half-year carry impairment risk if revenue recovery stalls — already saw £1.65m goodwill/intangible write-off in FY25 for PRFI.
• End-market cyclicality and supply-chain dependency. Multi-period customer destocking; SµRF availability hit by China-related raw-material restrictions 2025-11 half-year. Group is small enough that any one customer disruption is material — top customer ~10% of revenue 2025-06 full-year.
• MwT integration value still unproven. $13.2m paid (Oct 2023) generating £3.3m revenue in initial 6 months but heavy ongoing investment, US Silicon Valley relocation costs and goodwill of £7.3m at risk if synergies do not materialise 2024-07 full-year, 2025-06 full-year.

Operating leverage

Operating leverage is moderate-to-meaningful but mathematically capped by the small scale. Gross margin is high and stable (67–71%) — characteristic of a fabless IC business with capitalised R&D and outsourced manufacturing. Distribution and administration costs ran £14–15m for FY24/25 2025-06 full-year against revenue of ~£23m — i.e. a heavy fixed-cost overhang relative to sales. Incremental revenue at gross margin would mostly drop through: if FY27 revenue recovers to £25m (10–20% above current run-rate) at 68% gross margin and broadly flat D&A, gross profit would rise by ~£3–4m vs FY26 with most of that converting to operating profit, plausibly taking operating profit from a loss to £2–3m. The constraint: at sub-£25m revenue, fixed central + R&D costs (24% of FY25 revenue spent on R&D, £5.5m cash) consume most of the gross margin. Operating leverage exists, but only meaningful in absolute £ terms after revenue clears ~£25m.

Value-trap signals

• Three consecutive years of declining or stagnant pre-exceptional operating profit (£2.93m → £1.94m → £0.53m → loss).
• £2.4m of recent exceptional impairments (FY25 PRFI goodwill £1.5m + intangibles £0.1m + £0.7m development costs in earlier period).
• Sub-scale: £20m revenue with R&D running at 24% of sales is structurally challenged absent revenue inflection.
• Multiple guidance softens since FY24 — the half-year November 2024 statement flagged margin risk that materialised.
• Mitigants: net cash; dividend maintained throughout; surplus property monetised; cash-generative.

Earnings vs. expectations

• FY24 (Jun-24): guided "good progress with cautious view on inventory" → delivered revenue £22.9m broadly in line but pre-tax profit fell to £2.5m vs prior £5.2m on margin pressure — modest miss on profit.
• FY25 trading update (Mar-25): explicitly flagged second-half profit "below market expectations" — clear miss 2025-03 trading.
• FY25 result (Jun-25): confirmed revenue flat at £22.9m, profit from operations £0.5m, loss after exceptional — in line with re-set guidance, missed original.
• H1 FY26 (Nov-25): revenue −27% YoY to £9.2m, pre-exceptional operating loss £0.98m — in line with management's mid-year cautious tone.
• FY26 trading update (Apr-26): full-year statutory PBT ~£1.8m vs FY25 loss of £0.7m, but boosted by land disposal; operating loss for H2 — flagged operationally weaker than mid-year hopes. Pattern: more misses than beats over the past three years, partly reset by external destocking but partly self-inflicted via cost build-up and acquisition timing.

Conviction

3 / 5 — moderate. Anchored by: (i) clean balance sheet with verifiable net cash; (ii) tangible-NAV-near-price backstop; (iii) multiple valuation approaches converging on a similar range. Limited by: (iv) earnings volatility and capitalised R&D quality of earnings; (v) uncertainty about when (or whether) revenue clears the operating leverage threshold to drive meaningful EBIT.

Driver scoring rationale

• AI beneficiary (40): real semiconductor exposure to satellite ground equipment, mmWave 5G infrastructure and defence radar — picks-and-shovels adjacent — but not a primary AI-receiver. No GPU, memory, optical or data-centre power exposure. Mentions of "AI/HPC" in disclosures are framed as macro context, not own revenue.
• Operating leverage (60): high gross margin, heavy fixed R&D/admin base, but the absolute fixed cost £ is large vs revenue so leverage only "kicks in" at higher revenue levels.
• Earnings surprise trend (30): pattern of guidance reset down and missing original full-year ambitions.
• Cyclicality (60): semi end markets with classical destocking cycles, partially smoothed by industrial/defence end-market mix.
• Moat (45): sole-source niche positions and 12-year design-wins create stickiness, but Group is small and faces deeper-pocketed mmWave competitors.
• Leverage (5): net cash £11m, no debt — fortress.
• Earnings quality (40): capitalised development costs £17.9m; recurring exceptional items (impairments, land profits, FX); cash conversion average.
• Management quality (60): disciplined storage divestiture was value-realising, MwT integration mixed (regulatory delays, factory move cost overruns), consistent dividend.
• Growth momentum (40): trough year with order-book momentum into FY27 — directionally improving but absolute level subdued.