Broker tips: Frontier Developments, Spirent Communications

Analysts at Berenberg upgraded video games business Frontier Developments from 'hold' to 'buy' on Wednesday and hiked their target price on the stock from 300.0p to 330.0p, stating the group's pipeline had now de-risked the equity story.

Berenberg said that with the announcement that Frontier Developments' FY25 creative management simulation title would be Planet Coaster 2 and its FY26 title would be based on the Jurassic World IP, it now believes that the company's equity story has been de-risked.

"Both titles have proven audiences and Frontier has historically been able to generate good returns on these franchises," said Berenberg. "Assuming £30.0m of sales from Planet Coaster 2 and £60.0m of sales from JWE3 would see our FY25 and FY26 revenue forecasts increase by 14% and 36%, respectively. Adjusted EBITDA, which deducts capital expenditure, would increase to £21.0m in FY26."

The German bank added that valuing Frontier on earnings multiples was "challenging", given that it was currently breaking even. Using enterprise value/sales multiples, however, Berenberg said the company trades on a 50% discount to peers. In its bull case, Berenberg expects 100% upside.

Over at Canaccord Genuity, analysts upgraded telecommunications testing company Spirent Communications from 'hold' to 'speculative buy' on Wednesday following the group's H1 trading update a day earlier.

Canaccord Genuity said the upgrade was partly driven by Keysight's 199.0p cash offer for the business, which it said represented a roughly 15% upside to the stock's current price. Spirent shareholders have recently approved the deal, leaving regulatory and foreign investment clearances in the US, UK, France & Germany.

The combined entity will have a high ~80% combined HSE market share, but we understand the cooperation agreement commits KEYS to take responsibility for any required remedies," said Canaccord. "Shareholders are further entitled to a 2.5p/sh dividend before deal closure, with an extra 1p/sh should this take beyond 30/6/25. We hence estimate a ~16% TSR assuming deal closure in the guided Nov 24 - Apr 25 window."

However, the Canadian bank also noted that weaker-than-expected revenue and order performance, as well as management's commentary that it expects "challenging market conditions to continue in the second half of 2024, triggered material downgrades.

"We have cut our 2024-25 revenue forecasts by ~11% and adj. EPS by up to 38%. Adj. operating margins are now expect to trough at 7% this year vs prior cycle lows of 10%. Our assumption remains for a 5% revenue/47% EPS recovery in 2025, though given the severity of the current downturn this could well turn out to be conservative. In any case, it may not be overly relevant for Spirent shareholders as we expect the acquisition by Keysight to close by the long stop date of end-September 2025."

Reporting by Iain Gilbert at Sharecast.com