This year has been one of the most challenging for equity investors in years with major indices running up double-digit losses and Nasdaq, the poster child of growth investors, now in bear market territory.

Even the relative stability of the UK stock market has been tested, with steep slides following every run higher.

The FTSE All-Share index is now off around 1% in 2022, having been nearly 10% down in March. So how is it that a £140 million Scottish tech business has managed to navigate this erratic market mood so well?

A year ago, Calnex Solutions (CLX:AIM) was trading on a forward price to earnings multiple of 21.8 at 109p, having braved pandemic markets by listing its shares on the AIM market in September 2020 at 48p.

Now, the stock is trading at 154p, 220% up on its IPO price and equating to a forward price to earnings ratio of 25.2.

So many stocks have derated this year, yet Calnex continues to win fans who are eager to bid up the stock.

WHAT DOES IT DO?

Calnex is a global leader in the telecoms network testing space with a distinguished list of customers. Today, it serves businesses across the entire telecoms value chain, including network carriers such as BT (BT.A); hardware providers, including Ericsson (ERICB:ST) and Nokia (NOKIA:HEL); and chip companies such as Intel (INTC:NASDAQ).

The group is led by founder Tommy Cook, who has over 35 years’ experience in telecoms testing and measurement.

Cook puts the robust share price performance down to the company’s broad spread of products and global markets where it sells them. Last year, Calnex reported record £22 million revenue, up 23%, with double-digit growth across North America, Asia and elsewhere in the world.

FTSE 250 telecoms testing kit expert Spirent (SPT) is a major partner and sales channel for Calnex equipment.

KEY ATTRIBUTES

We think the real secret sauce to Calnex’s spicy progress is two-fold:

– Good management of the component shortages that have hurt so many businesses;

– The business lies at the heart of technological mega-trends that promise to generate substantial growth in the years ahead.

Calnex says supply chain and components accessibility are likely to be challenges for the rest of this year and maybe deep into 2023, yet the company’s manufacturing partner Kelvinside is a real procurement expert, which should help alleviate the worst impacts, believes Cook.

But the main reason to be optimistic about Calnex’s prospects stem from the major changes impacting the global telecoms and data centres industries. Not only are superfast fibre and new 5G mobile network technology being rolled out at pace, but new technologies such as cloud computing, autonomous vehicles, smart connected cities have emerged, all needing high performance testing.

Cloud computing is one great example, where operators such as Amazon (AMZN:NASDAQ), Microsoft (MSFT:NASDAQ), Meta Platforms (META:NASDAQ) and Alphabet (GOOG:NASDAQ) dominate.

These companies run large and growing data centre capacity and networks which requires managing vast quantities of data. This presents a substantial opportunity for Calnex as the testing and performance monitoring of these networks use similar technology to that used in the telecoms industry, usually conforming to the same international standards.

Calnex is opening up this market thanks to in-house research and development (it spent £3.9 million last year), where new and evolved products come with ever sophisticated software. Selling bundles of equipment to customers with ever richer features helps keep gross margins high. These were 75% last year.

Product development can also be bolstered by acquisitions, as with April’s 2.5 million iTrinegy deal, building out its software defined test networks technology. Calnex expects the business to be an important contributor to profit in future.

This all flows down to profit growth and, for the first-time last year, dividends, paying 0.84p per share for the 12 months.

RISKS TO CONSIDER

The squeeze on supply chains and components could get a lot tighter, which could slow project delivery and sales growth. Calnex might also struggle to get the right people recruited to fuel planned growth, although last year’s 19 new hires suggest this is not a big issue at present.

There is also the valuation of its shares. A March 2023 PE ratio of 25.2 is not eye-watering yet it is probably at the upper end of what many investors are comfortable paying now. With inflationary pressures continuing to fray the nerves of investors, any shortfall in revenue and profit progress could prompt a big sell-off in the shares.

That said, Calnex revealed a ‘record’ order book heading into full year 2023, giving Cook and his board confidence that the group can deliver ‘significant, sustainable growth’ over the coming years.

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