Friday, November 4, 2011

Anite Offers Exposure to Smart Phone Growth



A Smart Phone Stock to Buy






Anite is an interesting stock with which to play the growth in smart phones and next generation 4G LTE technologies. The stock is well placed for growth and is a very good candidate for investors looking to buy stocks for a GARP based portfolio.  Anite has two divisions, namely wireless testing and travel. The latter is an odd fit and will be discussed later, because the real excitement is with the wireless division.

A quick break down of historical six months revenue and adjusted segmental profits reveals the transformation in the business over the last couple of years. Firstly, starting with revenues…



Revenue
Oct 09
Apr 10
Oct 10
Apr 11
Handset
15,226
20,527
20,606
28,937
Network
8,634
11,392
11,965
12,183
Travel
11,335
11,656
9,728
10,275
Total
35,195
43,575
42,299
51,395


…and then a breakdown of segmental adjusted operating profits…

Adj Op Profits
Oct 09
Apr 10
Oct 10
Apr 11
Handset
375
3,085
3,537
6,466
Network
1,517
3,052
3,610
2,810
Travel
2,512
3,063
1,548
2,658
Total
4,404
9,200
8,695
11,934


…and the shift towards profit growth coming from higher margin handset sales is clear to see.

Unlike UK listed Spirent SPT or US listed Ixia $XXIA, Anite provides software whilst the previous companies primarily provide hardware. This means that Anite has more operational leverage and the expansion in margins has indeed been impressive.



A Smart Phone Growth Stock

The handset division is seeing increasing growth from testing in next generation LTE smart phones and in September’s update Anite confirmed that LTE handsets made up 46% of total handset testing revenues, as opposed to 17% for the same period last year.  Qualcomm $QCOM gave results recently and whilst most of the attention was focused on the strong growth of 3G in emerging markets, Qualcomm was very optimistic on LTE as well…

‘And what we're seeing in terms of forward-looking mix is, I would say, tremendous growth in the mass-market smart phones around the world. You're seeing a lot of designing activity in those mass-market areas. We're also starting to see, I think, more penetration of LTE and the leading AP processor coming together.’

…and this market looks set to grow. The early cycle semiconductor companies like Aixtron, Samsung and Intel all affirmed that the strongest growth area for their businesses is in smart phone chip demand.

Moreover, turning to Anite’s Network Testing division, there is a similar trend developing. There is reason to believe that Anite are guiding towards an acceleration in demand here and its not clear if this is baked into analyst forecasts yet. For example, back at the full year results in June, Anite said…

‘Business activity levels in the second half of the year were at more normal levels.  The second half of the year also saw the first minor sales of LTE products in network testing, although levels are not expected to become material until 2013. ‘
…but at the September trading update, Anite implied that ‘material’ sales would now be in the year to April 2012…

‘The Network Testing business performed in line with expectations in the quarter.  The first sales of the Invex 4G benchmarking product were made in the period, although material sales are not expected until later in the year following planned investment in the first half to support the product development.’

So, the handset division is trading ‘significantly in excess; of last year and ahead of expectations and network testing sales appear set for early acceleration. Meanwhile, the Travel division appears to have stabilized with revenues focused on servicing a large client in TUI.


Anite Evaluation

With a stock price of 66.5p Anite trades on a market cap of £198m and has net cash of £9.1m on the balance sheet. Analyst forecasts are for adjusted EPS of 4.5p and 5.4 for 2011-12 respectively.  This would put Anite on a forward PE ratio of 14.7x and 12.3x respectively. This is hardly expensive when you consider that Anite is primarily a software company so much of that profit will be translated into free cash flow.

Indeed, Anite are expected to generate £4.2m and £7.8m in FCF for the next two years and, with mid teen’s earnings growth looking set for the next few years, the stock is undervalued. An evaluation closer to 90p is possibly better value.

In addition, UK peer Spirent has $227m in cash on its balance sheet and is looking to make acquisitions. Anite would be a very good fit. Watch this space.