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Spirent takes off on 5G tailwinds

Rising demand for 5G and cloud services continues to deliver sales and profit growth
Spirent takes off on 5G tailwinds
  • Order book up 30 per cent at the end of 2021, including increasing number of multi-year contracts
  • Recent acquisition of wireless testing specialist Octoscope to boost future earnings

Spirent Communications (SPT) benefitted from increasing 5G network and cloud adoption, leading to higher order intake throughout the year and a “healthy backlog” entering 2022. Shares rose by 7 per cent on results day, but remain at the lower end of their historic range after catching some flak from the tech sell-off at the beginning of 2022.

The company provides services that accelerate the development and deployment of equipment and applications for cloud and mobile networks, and has seen enduring growth in sales and pre-tax profits over the past five years.

Last year was no exception, thanks to a strong performance from the smaller of Spirent’s two divisions, lifecycle service assurance. Sales in this division rose by 19 per cent to $261.6mn, and the operating margin grew by a full percentage point to 24.1 per cent over 2021. This helped to offset lagging growth in networks and security, which accounts for 55 per cent of revenues, as ongoing lab restrictions led some customers to tighten their belts.

A 30 per cent larger order book of $270mn (£205mn) at the end of the year, a fifth of which was for delivery beyond 2022, lends a measure of stability to future earnings – and these will also likely be buoyed by the recent takeover of wireless testing specialist Octoscope. 

Numis rated the stock a Buy, noting that 5G is “big and enduring tailwind”, and Spirent’s “top team keeps leveraging this tailwind in ever more ways to grow NPV materially”.

Encouraging signs come from Spirent’s investment in product development, which is critical given the competitiveness of the market, and increased by 10 per cent year-on-year from to $113.3mn. This, coupled with the current low valuation, leads us to rate the shares as a buy.

SPIRENT COMMUNICATIONS (SPT)  
ORD PRICE:246pMARKET VALUE:£2bn
TOUCH:245-24612-MONTH HIGH:311pLOW: 210p
DIVIDEND YIELD:2.1%PE RATIO:22
NET ASSET VALUE*:73pNET CASH:$145mn
Year to 31 DecTurnover ($bn)Pre-tax profit ($mn)Earnings per share (ȼ)Dividend per share (ȼ)
201745546.64.84.08
201847761.29.14.49
201950489.612.85.39
202052295.813.86.04
202157610414.76.76
% change+10+8+7+12
Ex-div:17 Mar   
Payment:10 May   
*Includes $208mn of intangible assets, or 34ȼ per share **£1 = $1.32

Last IC View: Buy, 259p, 12 August 2021