Berenberg starts Spirent Communications at 'buy', spies potential bids

Analysts at Canaccord Genuity initiated their coverage of Spirent Communications at a 'buy' with a 175.0p target price for the company's shares, arguing it was an "attractive" play on the upcoming deployment of 5G wireless technology.

The transition to 400G ethernet and its "promising" cybersecurity arm further buttressed the investment case.

According to analyst Kai Korschelt, the firm was set to enjoy a "material acceleration" in revenue growth to the high single digits, resulting in margins growing to 18% by 2020 and a 23% CAGR in earnings per share between 2018 and 2020.

"Early signs of improving demand are already visible at Spirent’s global peers, which have seen marked order and revenue improvements recently," he argued.

He also highlighted the scope for continued consolidation in the T&M sector and the company's attractions vis-a-vis potential private equity suitors.

"Spirent's strong balance sheet and cash generation coupled with modest valuation ahead of a new growth cycle are attractive merits vis-a-vis a private equity industry that needs to spend record amounts of 'dry powder'.

"Should M&A interest materialise at historic deal multiples, we could see ~33% to ~44% upside to the shares."

Trading on a 2019 price-to-earnings multiple of 15.7, the shares were also trading at an "undeserved" discount to global peers on 19.3.

"Recovering top line growth coupled with earnings upgrades should in our view drive a re-rating at least towards peer group levels. Our 175p target price is based on a peer multiple (161p) and a DCF (190p) and implies 35% upside."