The market overreacted to yesterday’s downbeat half-year results from Internet of Things (IoT) enabler Telit Communications Plc (LON:TCM), according to Morgan Stanley.
The shares were savaged, losing more than 40% of their value after the company reported on a half-year where it seemed everything that could go wrong, did go wrong.
The story was one of delays hitting revenues – both those that were expected to arrive in the first half and those previously expected to turn up in the second half.
That suggests there is a lot of pent-up demand that will eventually benefit Telit, but for now Morgan Stanley has adjusted its forecasts to take into account lower growth and lower margins.
The US bank described half-year revenues of US$178mln as “disappointing”; Morgan Stanley had forecast revenues of US$194mln.
“Telit continues to complain about the Intel LTE Cat 1 chipset with voice capability. According to management, customers are expecting deliveries but the chipset has not been certified yet. Management believes there is pent up demand for this product,” Morgan Stanley (MS) said.
“Actually some customers requested a more powerful chip at the same, lower price as the Cat 1, which impacted gross margins. The smart meter project started shipping but there has been lumpiness recently due to the addition of security features – again there should be some pent up demand for this product,” MS added.
Telit’s guidance for full-year revenues was US$400-430mln, which MS said “looks reasonable”, but given the caveats around the timing of certification of new modules the bank has considered it prudent to pitch its forecast at the bottom end of that range.
“For 2018, Telit has a strong pipeline of new projects (US$75mln ranging from autos to consumer IoT), but given the recurring delays we prefer to err on the side of caution too with 12% revenue growth vs. guidance of 15%,” MS said.
First half EBITDA of US$15mln was also well below MS’s forecast (of US$28mln), as the Italy-based London-listed Israeli technology company invested even more in the services business through acquisition than MS had expected.
“According to the CEO [Oozi Cats] at the results presentation, there are discussions internally regarding the cost structure of the business but we believe that CEO Oozi prefers to reinvest as much as possible to build a strong services business tomorrow. Management is guiding for flattish opex and this is reflected in our new forecasts,” Morgan Stanley said.
The US bank is now forecasting EBITDA for 2017 of US$51mln, down 24% on its previous forecast, while the estimate for 2018 EBITDA is chopped 11% to US$82mln.
As a result, its discounted cash flow-based target price is slashed to 269p from 350p previously, but with the shares trading at around 167.75p Morgan Stanley still advocates that its clients be overweight in the stock.
Meanwhile, chief executive Oozi Cats has shown his faith by purchasing 400,000 shares at a weighted average price of 171.87p.
The shares were up 16.5% in mid-morning trading to 174.7p.
--Updates for share price--