Berenberg upgrades Spirent Communications

The bank noted that it downgraded the shares to ‘hold’ last August due to a lack of immediate catalysts, difficult comps and a full valuation.

"While our downgrade did prove timely, at that time we had not yet anticipated that customers (eg telcos, network equipment makers) would delay their lab testing spend due to macro uncertainty," it said.

"With shares down circa 30% and trading at circa 14x P/E following the group’s profit warning for FY23, we think that now is a great entry point for a company that has high barriers to entry, is earning outsized returns on capital and has compounded free cash flow at a c18% compound annual growth rate from 2015-22."

Berenberg said it thinks customers are merely reacting to the macro conditions and, therefore, will not delay their standalone 5G build-outs for longer than 9-12 months, especially given that their spectrum and network build-out commitments are already in place.

"Hence, Spirent will probably release much better expectations for FY24 at a similar time next year, in our view. With this in mind and considering the strong balance sheet and potentially accretive M&A in the near term, we upgrade Spirent to buy, but recommend that investors take at least a c15-18-month view."

Berenberg cut its price target on the shares to 250p from 300p.