JP Morgan said it expects the company’s operating profit growth to accelerate over the next couple of years on the back of cost cuts, an organic revenue rise of at least 2.5% per year and a boost from acquisitions.
“We believe the lacklustre share price performance in 2017 was at least partly driven by sluggish organic growth early in 2017 and a lack of earnings growth relative to the sector,” it added.
“However, organic growth picked up in the second half and is likely to have ended the year on a positive note.”
The instrumentation and controls company is forecast to report flat operating profits in 2017 despite further revenue growth. The following year, however, JP Morgan estimates operating profits will gain at least 14% with organic revenue growth of at least 2.5%. It predicts operating profit growth of 12% in 2019.
Acquisitions to lift revenue
Spectris has completed five acquisitions over the past 18 months, including Millbrook and Concept Life Science, which deliver testing services to the auto and pharma industries, respectively.
JP Morgan expects the annual number of new model launches by the auto industry in Europe to rise by almost 50% between 2017 and 2020.
“We expect customers’ need to contain costs, a shortage of testing capacity and the need to reduce development times to result in increased use of testing services such as those of Millbrook,” it said.
“This should translate into double-digit growth in service-related revenue derived from the car industry.”
JP Morgan said the shares are trading at a discount to the sector and have a 16% upside potential to its revised price target of 2,900p.
Shares rose 2.9% to 2,558p in morning trading.