Canaccord Genuity moves Spirent Communications to 'speculative buy'

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