Canaccord slashes Spirent forecasts but still sees upside

Canaccord Genuity has slashed its target price for Spirent Communications by 40% after the third downgrade to forecasts this year, but maintained a 'speculative buy' rating saying that a rebound is still likely.

Spirent Communications cut its near-term outlook on Wednesday as it pointed to an "extremely challenged" telecommunications market and the fact its largest customers are delaying expenditure and technology investments.

"As a result, there is not enough near-term strength in the orderbook to support our expectations for the final quarter trading, and accordingly we reduce our outlook for the near term," it said. "The impact of negative operating leverage will very materially affect operating profit in this financial year."

Order intake was down 24% over the first nine months of the year, compared with the 19% decline in the first half, which Canaccord said implies a 35% drop in the third quarter alone.

Canaccord said earnings per share (EPS) forecasts have been cut by 50% for 2023 – cutting its target price from 240p to 145p – but predicted that this year will likely be the trough.

"The silver lining now is that in a historic context the share price and our new estimates signal trough from multiple angles: 1) Since 2011 Spirent has never seen a 20% year-on-year decline for more than six months, suggesting a snapback in 2024 is possible; 2) Operating margins at ~10% are close to 2015 lows (9%); 3) The shares' FY23E 14x P/E and 1.2x EV/Sales are at historic trough," Canaccord said.

"A rebound in demand, EPS and share price is, in our view, more a 'when' not an 'if' question and we hence maintain Spec Buy."

The stock was up 3% at 92.6p by 1049 BST, after dropping over 30% the previous session.