Gamble of the week: Israeli-based telecoms designer

published 13 January 2012

The stockmarket can be a brutal place for small caps. Take BATM, the Israeli-based designer of telecoms (65% of sales) and medical (35%) equipment. Its shares crashed 30% after a profit warning in mid-December. It blamed a "softening in demand from certain US operators for its legacy products". In response, the board is "undertaking a strategic review with the possibility of withdrawing from this segment in 2012".

However, these older, low-margin products account for only about 15% of turnover, with the firm's main bread winner being its exciting range of advanced internet protocol (IP) equipment. Here, prospects are mouth-watering, as evidenced by recent successes with telecoms vendors Alcatel-Lucent and Motorola.

This is one reason why CEO and founder Dr Zvi Marom recently bought one million shares at an average price of 12.4p. He recognises the firm's huge opportunities. The popularity of smartphones and tablets will eventually force telecom firms to upgrade their IP network capacity.

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For BATM, which specialises in broadband routers and switches that help to reduce running costs, increase bandwidth and deliver web services, this is great news. Furthermore, BATM's nifty kit offers the capability to migrate overloaded networks to the newest 4G standards without having to replace everything lock, stock and barrel. That's a huge boon when cash is tight.

BATM Advanced Communications (LSE: BVC)

The medical division should also move into the black shortly. Here, BATM distributes niche products and makes diagnostics/sterilisation equipment that was originally born out of its telecoms unit. I am anticipating 2012 turnover and underlying operating profit of $110m and $6.5m respectively (assuming the legacy unit is closed), along with net funds of about $40m. On this basis, I value the group on a 1.5 times sales multiple. Adjusted for the cash pile, that delivers an intrinsic value of about 30p a share, or double today's level.

There are a couple of possible snags with the company. For one thing, BATM is a small player competing in a fast-moving industry against much bigger rivals. Furthermore, customer concentration is high. This is why performance was dented two years ago when Nokia Siemens stopped ordering. Finally, there are the usual considerations associated with Israeli companies such as foreign-exchange issues, geopolitical problems and withholding tax.

All the same, with first-rate products and the potential to benefit from growing IP infrastructure spending, BATM is well placed to benefit in this sector. Preliminary results are due out in March.

Rating: SPECULATIVE BUY at 14p (market capitalisation £57m)

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.