ShoreCap starts Spectris at buy

Spectris was navigating tough market conditions, like many of its peers, but management had also been restructuring the business to capture long-term secular growth in the markets which its serves, analysts at ShoreCap said, leading them to initiate the shares at a 'buy'.

Furthermore, although margins were at a low point, ShoreCap analysts Ben McSkelly and Robin Speakman, said they perceived a recovery back towards historic levels which would allow the specialist instrumentation and controls business to leverage a secular growth trend around the mid-single digit level through the cycle.

The company's new 'final assembler model', by which it outsources nearly 90% of is manufacturing, together with strict capital allocation, should allow margins to return to historical levels, the broker argued.

Valuation-wise the stock was also 'attractive', ShoreCap noted, offering investors "a strong (indeed inefficient, in our view) balance sheet", with a net cash position set to emerge over the next year or so.

In turn, that meant Spectris had the financial muscle necessary to be active in M&A, with a small bolt-on and strategic deals likely, with management having indicated a stronger move into services, according to McSkelly and Speakman.

"We expect a stronger trading environment to emerge over the next year, noting that the enterprise value/earnngs before interest, taxes, depreciation and amortisation multiple for fical year 2017 falls to 9.0x with a 6.4% free cash flow yield funding a growing dividend stream."