Berenberg downgrades Telit Communications to 'hold'

Analysts at Berenberg downgraded their recommendation on shares of Telit Communications once the 'dust had settled' following the exit of its boss, telling clients there was still a long way to go to "re-establish the credibility" of the company.

They also reviewed some of their assumptions as well as the scope for the business to rebuild, which prompted them to move to a 'hold' recommendation on the shares from a 'buy'.

In tandem, the target price for the stock was marked down from 300p to 180p.

In particular, due to a lack of the necessary certifications, they lowered their gross margin estimates for the backhalf of 2017 by 280 basis points 38.3%.

For the year in progress, the negative impact on the company's bottom line would be compensated for by their now lower expectations for the company's operating expenditures, in part due to the departure of the chief executive due to savings from his base salary, bonuses and share-based payments. R & D certification costs were also likely to decrease in the second half of 2017, they said.

Nevertheless, they went on to warn clients to keep a close eye on how gross margins evolved.

"We would, however, watch the gross margin development carefully in the coming year. Scenario analysis shows that every 100bp contraction in full-year gross margin could cause at least a 10% impact to our future-year earnings forecasts."

Cost saving initiatives were also expected to be announced, although it was unlikely that they would affect the company's 2017 financials.

Going forward, they said the potential catalysts which were important to watch included: details of the operational review, the stability of its relationship with commercial lenders, board member appointments and progress on certifying its VoLTE Cat 1 module.