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Spirent Communications (LON:SPT) report: Target price raised to 121p; rating “Hold”

Contributed by Daniel Stewart & Company

By Daniel Stewart & Co

- Post FY’09 results (Mar 4th) we have reviewed prospects for telecom capex in 2010-12 and expect a moderate upturn, +6%YoY this year. The drivers are a balance of next-generation mobile smartphone demand and expansion of backhaul, as highlighted by Cisco System’s CRS-3 100Gb/s router announcement last week. We expect strength in Spirent’s Performance Analysis division, +17%YoY in FY’10, triggering operational gearing.

- Resulting EBITDA margin improvement (E) is; FY’10 26.6% (from 24.3%); FY’11 29.2%.

- Our DCF-based valuation, WACC 9.8%, indicates 7.1x EV/EBITDA in Dec’11. From our initial view Spirent's EBITDA multiple has doubled; we will watch for evidence of a strong upturn in demand which at this point is not forthcoming.