Last week, I was screening the UK market for attractive growth stocks when I stumbled on a fast-growing company I’d never heard of before – Calnex Solutions (LSE: CLX). Calnex is a Scottish technology business that specialises in testing and measurement services for telecommunication (5G) networks. It listed on the Alternative Investment Market (AIM) in October last year.
After doing some further research on Calnex, I came to the conclusion that this growth stock is a good fit for my portfolio and I bought some CLX shares. Below, I’ll explain why I like the stock.
Calnex: a UK 5G stock
Calnex appears to have significant potential for growth. As the company explains in a video here – the arrival of 5G and cloud computing mean that the telecoms industry is going through major changes. New technologies such as autonomous vehicles and smart cities require new telecoms standards and mobile networks need to be rapidly expanded to facilitate this technology. These network upgrades are benefiting Calnex. It’s worth noting that the market for 5G testing equipment is expected to grow at 9% per year between 2020 and 2027. This industry growth should provide long-term tailwinds.
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One thing that stands out to me about Calnex is its customer list. It includes mobile carriers like BT Group and AT&T, hardware providers such as Huawei and Ericsson, and semiconductor companies like Qualcomm and Intel. This incredible customer list suggests to me that Calnex has a competitive advantage.
Strong growth
Its financials are impressive. Between FY2018 and FY2020, revenue climbed from £8.42m to £13.7m while net profit jumped from £0.75m to £2.79m. Return on capital employed (ROCE) was 36% in both FY2019 and FY2020 meaning the company is very profitable.
Meanwhile, half-year results, posted in late November, were strong. Here, the company posted a 37% increase in revenue along with a 91% increase in adjusted earnings per share. The company also advised that it is now debt-free after it repaid all its debt in October.
Founder led
Another reason I’m bullish on this UK 5G stock is that Founder and CEO Tommy Cook owns 20% of the shares. That means management’s interests are aligned with those of shareholders.
Additionally, Mark Slater of Slater Investments has just invested in the stock. Slater is one of the best stock pickers in the UK. I see his investment as very encouraging.
Valuation
Turning to the valuation, Calnex currently trades on a forward-looking P/E ratio of about 30. This is high, but I think this valuation is reasonable given the company’s growth prospects. However, it doesn’t leave a huge margin of safety. If future performance is disappointing, the stock could fall.
Risks
Aside from the valuation risk, there are a few other risks I’ll be keeping an eye on.
One is currency. Around 85% of the company’s orders are made in US dollars. However, the company reports in sterling. A swing in the GBP/USD rate could have a big impact on earnings.
Another issue is that 50% of revenues come from just 10 customers. This means there’s some customer risk.
Calnex shares: I’m a buyer
Overall, however, I think there’s a lot to like about Calnex. I see it as a good play on 5G and smart cities technology.
I’ve bought this UK 5G stock for my ISA and I’m excited about its long-term growth potential.
