Analysts at Canaccord Genuity took a fresh look at telecommunications testing outfit Spirent Communications on Thursday after the company finished 2021 “on a high note” and said it was “encouraged” by signs that some of its top customers were planning to increase capex in the current year.
Canaccord Genuity said Spirent ended the year with a “solid” order book and stated it was further encouraged by signs that three of the firm’s top customers, AT&T, Verizon and T-Mobile, were planning to increase spending on network equipment and 5G deployments by a combined 9% in 2022.
The Canadian broker noted that as the major US network providers continue their network upgrades, it expects another year of “solid spending growth” on 5G as well as fibre and high-speed ethernet rollouts and pointed out that Spirent should also benefit from a ramp-up in capex at Dish, which has begun to build a 5G greenfield network with a $10.0bn overall budget, with Spirent named supplier of 5G core network test and validation solutions.
“The US makes up 55% of Spirent’s revenues, and we estimate the three US service providers plus Dish generate circa 35-40% of sales, buying its testing and network assurance solutions,” said the analysts, who stood by their ‘buy’ rating and 320.0p target price on the stock.
While Canaccord added that test and measurement was “a relatively small part of overall telecom capex”, it believes a double-digit increase in spending budgets will provide “a solid growth backdrop for Spirent”.
Analysts at Berenberg slightly raised their target price on technical products and services supplier Diploma from 3,150.0p to 3,200.0p on Thursday, stating the group had made a “strong start” the year following a record performance in 2021.
After Diploma’s record full-year, in which revenues grew by 46% year-on-year, margins improved 2,700 basis points to 18.9% and free cash flow conversion hit 103%, Berenberg pointed out that 2022 had also started strongly for the company.
Berenberg said Diploma achieved first-quarter underlying revenue growth of 16% year-on-year, with operating margin guidance of 18-19% maintained, despite increasing inflationary pressures.
The German bank also highlighted that while Diploma has guided to first-half weighted growth for 2022, its analysts expect the demand outlook to remain “bright throughout the year”, supported by continued strength in Windy City Wire.
“We continue to view Diploma as a key ‘buy’ idea in the UK industrials sector, with the shares down by 22% from highs, trading on 29x FY 2023 earnings,” concluded Berenberg.
JPMorgan Cazenove added Rentokil Initial to its ‘Analyst Focus List’ on Thursday, saying it is one of the highest-quality names it covers, with a strong long-term equity story buoyed by the acquisition of US rival Terminix in December.
“At these levels, we see the risk/reward as significantly attractive,” said JPM, which rates the shares at ‘overweight’ with a 700.0p price target.
“There are risks associated with the deal getting done and the integration, but the upside here is material we believe. Our proprietary geospatial locations analysis shows there should be significant potential for synergies, even excluding upside at TMX’s and Rentokil’s own margins.
“At the same time, our locations analysis and discussion of national accounts both help alleviate competition concerns.”
JPM said that given Terminix’s margins are currently below historical levels and peers, it sees further upside from the improvement within the business and reckons that 40%+ earnings per share accretion by 2025 is achievable.
