Broker tips: AO World, Spirent Communications, RS Group

Shore Capital upgraded AO World on Wednesday to 'buy' from 'hold' as it said the online electricals company was "emerging as a capital-light cash compounder" within an industry it believes will "accommodate for margin recovery over the short term" and was at a volume trough versus the past ten years.

Shore said that over the medium term, building blocks are clearing for AO to generate, on its estimates, high single digit percentage sales growth and a circa 20% earnings per share compound annual growth rate, before strong free cash flow enabled buyback optionality.

This could offer a further circa 15% uplift to the broker’s FY27 EPS forecasts, it said.

"On this basis, we see a runway for AO to achieve 8.6p of FY27F EPS, which on a price-to-earnings in-line with today, would imply an FY27F share price of double 105p."

Analysts at Canaccord Genuity raised their target price on telecommunications testing company Spirent Communications from 175.5p to 199.0p on Wednesday following Keysight's recent cash offer.

Canaccord Genuity stated following Viavi's 172.5p bid it thought a counterbid from Keysight was unlikely due to "dominant combined market share" in high-speed ethernet/HSE testing solutions. However, Keysight's new offer now implies a 2.9x enterprise value/sales ratio, a 19.5x EV/underlying earnings ratio and a 30x price-to-earnings multiple on its 2024 forecasts - a solid 15+% premium to prior industry transactions and more than 60% above price-to-earnings multiples of listed comparators.

"Admittedly, Spirent's earnings are cyclically depressed, but so are those of its peers and with little signs of a demand recovery so far, Keysight's offer looks to us like a 'clearing price'," said Canaccord Genuity.

The Canadian bank said potential catalysts from here will come in the form of regulatory reviews of the deal by US and/or UK authorities, which would likely trigger a widening discount to the offer price, Viavi potentially coming forward with a raised bid, or a "white knight" counterbid from Rohde & Schwarz.

Numis has cut its estimates for industrial and electrical products maker RS Group but kept a 'buy' rating on the stock, saying that the company was well placed to benefit from gradually improving macro conditions.

The broker forecasts a "modest market recovery" for RS Group in the current financial year ending 31 March 2025, but said that ongoing higher operating and finance costs has prompted it to slash earnings per share estimates by 8%.

Meanwhile, Numis reckons that RS will have seen a 50% "drop-through" of lost revenues to profit through this cycle due to cost inflation – compared with 25% in prior downturns – which is also "suggestive of a lagged response to managing a changing market dynamic".

However, the broker added: "When recovery materialises, we hope operational gearing can still work in reverse, particularly as ongoing cost pressure should be partly offset by identified cost savings."

Looking ahead, Numis said that, with S&P's closely following manufacturing PMIs now positive in the UK and US, "encouragingly lead indicators" were now steadily improving.

"The cycle appears to be turning and, as it does, we would expect RS to benefit. We retain a 'buy' rating on a reduced 1,050.0p target price (from 1,075.0p)."