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Spirent thriving in a connected world

The telecoms testing group is enjoying rising sales and margins at a time of demand for new technologies
March 14, 2019

It hasn’t exactly been smooth sailing for Spirent Communications (SPT) in recent years. Back in March 2017, the telecoms testing group announced that it had undertaken a “fundamental review” and a “narrowing of focus” across its business lines. Accordingly, it booked a $69.1m impairment charge against its 2016 preliminary numbers – sending it plunging into the red.

IC TIP: Buy at 155p
Tip style
Growth
Risk rating
High
Timescale
Medium Term
Bull points

Widespread demand for faster connectivity

Rising margins

Strong cash generation

Small but growing dividend yield

Bear points

Cyclical end markets

Vulnerability to trade disputes

Spirent’s problems largely pertained to its wireless operation, which had suffered falling demand due to the consolidation of the smartphone industry and reduced customer spending on 4G research and development. A risk, one might venture, of cyclical industries – new technologies require significant investment (and testing) in their initial stages, but this will inevitably lessen over time.

That said, Spirent has now ostensibly emerged as a streamlined and more robust version of its former self. True, it remains beholden to cyclical trends – but these are currently working to its advantage. As demonstrated by its full-year results for 2018, the group is benefiting not only from rising demand for faster ethernet connectivity, but also from the hotly -anticipated global roll-out of 5G (faster mobile data) technology.    

Wireless now sits under the connected devices division and this business has shown positive signs of recovery. Continuing revenues “stabilised” at $79m – representing 16 per cent of the top line. Meanwhile, cost-cutting lifted the adjusted operating margin from 4.8 per cent to 13.3 per cent, giving operating profits of $10.5m – up from $3.8m. Spirent has been “directing resource” to 5G products, and is collaborating with National Instruments (US: NATI) to launch 5G device test products in the second half.

Networks and security – Spirent’s largest business accounting for 60 per cent of sales – saw continuing revenues rise 9 per cent to $285m, buoyed by customer interest in high-speed ethernet and satellite-positioning test systems. Moreover, such growth came despite a supply embargo with Chinese network equipment manufacturer ZTE. While this embargo has been lifted, potential for future bans can't be ruled out.

Sales for networks and security were also bolstered by a one-off project worth around $10m. The division expanded the scope of its flagship security offering, CyberFlood, and won 25 new security customers. Its adjusted operating margin rose from 16.8 per cent to 19.8 per cent, with profits up 28 per cent to $56.4m.

Meanwhile, lifecycle service assurance saw a smaller 3 per cent uptick in sales to $113m – tempered by order placement delays, but supported by the popularity of Spirent’s VisionWorks offering, which helps to isolate and resolve problems quickly within phone networks. Spirent received new VisionWorks orders from all existing clients, and added three new major customers. Reflecting marketing investments, lifecycle’s operating profits dipped by 3 per cent to $17.4m.

Spirent’s sales seem minimal next to the estimated size of the service assurance market in 2018 ($3.1bn). This represents an opportunity. Broker Liberum believes that the “steady expansion” of VisionWorks’ presence within major US tier one operators, and entry into some of the smaller North American operatorsunderpins growth prospects.

Spirent’s net cash position (post-2017’s special dividend) is strong – although free cash flow declined by a tenth to $50.9m, after higher fourth-quarter activity levels lifted trade receivables at the year-end. 

SPIRENT COMMUNICATIONS (SPT)  
ORD PRICE:155pMARKET VALUE:£948m
TOUCH:154.8-155.2p12-MONTH HIGH:162pLOW: 109p
FORWARD DIVIDEND YIELD:2.7%FORWARD PE RATIO:16
NET ASSET VALUE:58ȼ*NET CASH:$122m
Year to 31 DecTurnover ($m)Pre-tax profit ($m)Earnings per share (ȼ)Dividend per share (ȼ)
201645843.46.93.9
201745546.64.79.1
201847761.29.04.5
2019*50580.511.05.0
2020*54193.712.85.5
% change+7+16+16+10
NMS:3,000   
BETA:0.85   

*Includes intangible assets of $158m or 26ȼ a share

**Liberum forecasts, diluted EPS, includes special dividend in 2017

£1=$1.31