- Dividend increased
- Trading at a discount to peers
As the world becomes more interconnected, Spirent Communications’ (SPT) addressable market grows. Spirent provides test and assurance solutions for telecoms networks, so every time a new node appears, there is an opportunity to sell services to make sure things are running smoothly.
The big thing currently is 5G. People have been discussing the topic for a long time but only 3 per cent of the network has been fully upgraded globally so far. In the first half of the year, Spirent signed 350 new 5G contracts. This was down from 400 last year, but up from 250 in the first half of 2019.
This helped drive 12 per cent growth in order intake. The adjusted operating margin remained flat at 17.5 per cent because product development and marketing costs increased broadly in line with revenue. Research and development has resulted in a new live assurance solution called Vantage, which the company says is easier to use for smaller businesses.
Marketing costs currently take up around 24 per cent of total revenue, which looks high. However, it is necessary given the competitive market. US-listed Keysight Technologies (US:KEYS) is the biggest rival. The total addressable market is guaranteed to grow; the only risk is that Spirent doesn’t take it.
A concern is that investment in marketing and competing on prices keeps margins suppressed for all businesses. However, the overall market will be so large that there is surely space for more than one testing service.
Broker Jefferies also points out that Spirent’s 2023 price/earnings ratio of 18 currently sits below its peer group, with Keysight trading on 21. We like the best value options and therefore stick to buy.
Last IC View: Buy, 246p, 10 Mar 2022
SPIRENT COMMUNICATIONS (SPT) | ||||
ORD PRICE: | 277p | MARKET VALUE: | £1.69bn | |
TOUCH: | 276-277p | 12-MONTH HIGH: | 311p | LOW: 210p |
DIVIDEND YIELD: | 2.1% | PE RATIO: | 22 | |
NET ASSET VALUE: | 74p* | NET CASH: | $163mn |
Half-year to 30 Jun | Turnover ($mn) | Pre-tax profit ($mn) | Earnings per share (ȼ) | Dividend per share (ȼ) |
2021 | 255 | 34.8 | 4.87 | 2.39 |
2022 | 280 | 40.3 | 5.70 | 2.63 |
% change | +10 | +16 | +17 | +10 |
Ex-div: | 11 Aug | |||
Payment: | 16 Sep | |||
*Includes intangible assets of $205mn, or 34ȼ a share. £1=$1.21 |