Telit Communications’ market share on the up, says study

Telit Communications (LON:TCM) received the thumbs up from broker Investec as a study on the global machine – 2 – machine communications sector revealed that the company’s share of market jumped over 2010.

Published earlier this week, the study by Beecham Research, a consultant specialising in the machine – 2 – machine (m2m) communications market, reckons that Telit's market share of the ‘modules’ market over 2010 rose from 12.4% in 2009 to 16.1% in 2010.

m2m ‘modules’ are small but critical hardware components at the heart of m2m technology and devices. The modules use special m2m communications software and can be likened to, for example, a modem for a laptop.

If Telit’s acquisition of Motorola’s m2m unit earlier this year is included in Beecham’s analysis, Telit’s share of the global industrial grade m2m modules market jumps to 22.2% on a pro forma basis.

More broadly, Beecham found that the market for industrial grade cellular m2m modules grew overall in line with its previous forecasts, with 39% volume increase offset by a  price decline higher than 15%.

According to Beecham, the global m2m sector for industrial grade m2m modules expanded 17% in 2010 from $700m to $819m on an underlying basis, in line with its forecast from the prior year. Beecham is keeping its 2011 forecast flat at $925m.

m2m technology covers all hardware, software, and processes that enable machine to machine and machine to people communication using dominantly wireless communications, which in turn lends it to integration with the internet. The resulting m2m networks are allowing a wide range of new business opportunities and connections between consumers and producers to be explored.

The growing sophistication of the technology is being matched by an increasing number of applications, including in fields such as telematics, fleet management and the automatic remote reading of data – for instance gas meter reading – as well as security technologies, point-of-sale terminals and healthcare.

As far as Telit is concerned, m2m “turns data that has always been there into valuable information: new information that empowers individuals, businesses, the economy and the environment, in short, improves a nation’s health. It’s that simple, but the concept has huge ramifications”.

The company’s core business is the development, manufacture and marketing of communication modules for m2m applications. As an integrated manufacturer it owns intellectual property involved in the hardware, software and processes related to communication between different machines and between machines and people.

Certainly the potential for further growth in the market looks promising, auguring well for Telit’s prospects. Broker Investec, for instance reckons that at the moment there are around 150 million m2m devices out of a total potential of 50 billion.

The drivers for growth include increased legislation in areas such eCall, a pan-European initiative which aims to link up emergency services across the region via telematic devices, for instance in cars, as well as tolling and e-metering.

There is also renewed interest in the technology from mobile operators, including AT&T, Verizon, Sprint and Orange, who over the last 24 months have started to promote m2m opportunities more aggressively.

Investec regards the Beecham report as positive news for Telit, underpinning its upbeat prognosis for the company’s prospects.

As for the outlook for corporate newsflow, the broker highlights the end of the company’s first half this month, with full interims expected in September.

Investec analyst James Goodman says: “We expect the results to corroborate market growth predicted by Beecham and we will be looking for further positive commentary around the Motorola integration.”

With the Motorola acquisition only becoming consolidated from March 2011, Goodman is eyeing a 40/60 split on his revenue forecast for the year between the first and second halves.  The acquisition left as the only pure-play left in the m2m market.

The Investec analysts are anticipating full year 2011 revenue will come in at just under US$200 million, with pretax profits of US$15.3 million, giving earnings per share of 10.2 cents.

For 2012, they are looking for revenues of US$237 million, with pretax profits of US$23 million, giving earnings per share of 13.9 cents.

The broker reiterates ‘buy’ for the shares with a price target of 120 pence, arguing that the stock currently looks undervalued both in terms of prospective organic revenue growth and the underlying operational leverage in the company’s business model.

In March it posted its full year to December 2010 results showing a swing into profit as revenues jumped 48.2 percent rise in revenues to US$131.7 million.

The group reported a pretax profit of US$6.4 million compared with a loss of US$4.1 million previously. Telit also revealed it had reduced its net debt to US$7.2 million at the end of 2010 from US$10.4 million a year earlier.

The group has a very international flavour to its operations, with headquarters in Rome and R&D centres in Trieste and Cagliari in Italy, Seoul (Korea), Sofia Antipolis (France) and Tel Aviv (Israel).

The 425-strong company boasts 20 sales offices worldwide and uses more than 50 resellers to cover 77 countries and over 2000 customers.

The company was founded by Oozi Cats, who is estimated to directly own about 3% of the company.

If you want to learn more about Telit and its market download the latest telit2market m2m magazine here :www.telit.com/ebook/