Centralnic shares offer over 100% upside, reckons Berenberg


Centralnic Group PLC (LON:CNIC), Spirent Communications PLC (LONLSPT) and Dotdigital Group PLC (LON:DOTD) are the top three shares to buy in the networking and communications subsector, according to broker Berenberg.

The trio are “very different” but what connects them is their “top-three positions in niche and highly technical markets”, with all three stocks “often overlooked because they are viewed as cyclical, too expensive or too small”.

In a note to clients on Wednesday, Berenberg initiated coverage of the three companies with ‘buy’ recommendations on each, with CentralNic given a price target of 180p that offers around 120% upside to the last close price, Dot Digital 290p and Spirent 310p, offering around 30% upside for both.

CentralNic, through operating across the entire domain name supply chain from top level to backend and via wholesale and retail channels, has 99% SaaS-based recurring revenue and “customers hardly change supplier”.

Management is using the company’s free cash flow (FCF) to consolidate what is currently a fragmented market, the analysts noted, acquiring attractive acquisition targets at near distressed multiples.

With the group’s new online marketing business offering “potential for substantial organic growth, which we think has been largely overlooked by the market, we see scope for outperformance”.

As the business “remains unknown to many investors”, the analysts said it has a P/E ratio of around 10 times, which is “highly attractive despite its market opportunity”.

Dotdigital meanwhile is a mid-market leader in cloud-based marketing automation software (MarTech), serving both B2B and B2C customers.

With the company continuing to invest in building out an omni-channel marketing platform and a unified customer data view, the broker sees “considerable scope” for upselling to customers, with this and faster client acquisition giving rise to a potential scenario where EPS “could be 50% higher by FY 2024”.

The stocks valuation is high, but with around 40% return on capital employed (ROCE) and FCF having compounded at a 25%, the analysts are “not surprised”.

“Nevertheless, given the rapid consolidation in the MarTech industry at multiples far in excess of dotdigital’s, we still see scope for the shares to perform.”

As for FTSE 250-listed Spirent, a provider of test and assurance solutions for the telecoms market, the complexity of its services and the historical cyclicality of the business in sync with telecoms operators’ capex cycles, “it has often been ignored by investors”.

Its offering includes products and solutions that are used to test, assure and secure high-speed ethernet and internet protocols, mobile networks, clouds, devices and applications.

“However, there are reasons now to be more bullish, not least because the company is experiencing 5G rollout tailwinds, but it also has: 1) a new management team; 2) a new strategic focus powering a rapid shift towards recurring revenue; and 3) a new business mix with far less dependence on volatile device testing.”

The long-term outlook is for “stable and predictable growth”, with short-term upside coming from 5G deal volumes in the first quarter of 2021 were “annualising far above our FY 2021 estimates”.

An attempted acquisition by US giant Viavi of Spirent peer EXFO Inc for a significantly higher multiple suggests there is still upside ahead.


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