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Telit Communications sell-off overdone given strong 2010- Northland Securities

The Machine-to-Machine communication specialist is set to double earnings in 2010, but Friday saw the stock fall 10 percent in reaction to news of an unsuccessful acquisition attempt. Northland analyst David Johnson thinks the stock has fallen too much.

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Telit Communications’ (LON:TCM) share price fall seems overdone, according to Northland Capital analyst David Johnson.

On Friday Telit shares dropped almost 10 percent after told investors that its profits will be hit by US$400,000, due to fees relating to an unsuccessful acquisition attempt.

Telit revealed that it had been actively exploring a potential acquisition, that would have materially expanded its reach and scale, but it failed to secure the deal. 

However Telit said it will continue to explore consolidation value enhancing opportunities in the New Year.

“(The) acquisition target was unidentified but both Motorola’s M2M division and Sagem have been speculated as ‘in play’ by the press,” Johnson said. 

“There has been considerable consolidation in the M2M module market with the other three of the global top four (Telit is third) having changed hands in the past 18 months. 

He adds: “Telit has participated in this consolidation in a very minor way but has consistently walked away from the bigger deals on valuation grounds.” 

The analyst highlights that the consolidations in the sector is driven by attractive growth forecasts with the growth of the ‘Internet of things’ - i.e. a network of machines communicating with each other. 

“Friday’s share price reaction (off 10%) seems overdone for a business that will have more than doubled EBITDA on revenues up 47.5% on an organic basis,” Johnson said. 

“But after a very strong share price performance in 2010 (+226%) profit taking on any perceived misstep is to be expected.

“We maintain our BUY recommendation and 125p price target.”

Telit shares have more than trebled in value over the past 7 months or so, rising from just 25 pence per share in early May.

Since then investors have really got behind the company and before Friday’s statement the stock was the highest it had been since spring 2008.

By early afternoon, Telit shares had dropped 6.75 pence, or 8.5 percent, to trade at 72 pence per share.

Merger and acquisitions (M&A) has been a hot topic in the M2M sector for sometime, and indeed Telit recently told investors that it ready to hit the acquisition trail, back in its interim results statement in September.

Telit’s revenues grew 61 percent, to US$59.6 million, in the first half of 2010 and it reported adjusted earnings (EBITDA) for the six months of US$5.4 million. 

Immediately after the interims, Northland Capital - then named Astaire Securities - upped its revenue forecasts substantially. 

It expects Telit to generate revenues of U$131 million during the whole year, with earnings expected to reach US$12.5 million. 

Speaking with Proactive Investors, after the interims, Telit’s chief financial officer Yariv Dafna said: "There are a lot of M&A opportunities we would like to address."

Then last month, Johnson published a research note centred on the spate of M&A activity among Telit’s peers, after Novatel Wireless (NASDAQ:NVTL) bought privately-held Enfora for up to US$70 million.

Johnson highlighted that Enfora was ranked as the 4th largest player in the sector in 2009, with 5 percent of the market - behind Telit with 12.4 percent, Sierra Wireless (NASDAQ:SWIR) with 26.3 percent and Gemalto’s (EPA:GTO) Cinterion unit, which leads the sector with 28 percent.

“The M2M market has undergone a period of considerable consolidation with three of the four largest suppliers having now changed hands and there is scope for further activity,” Johnson said.

The analyst also stressed that Telit could command a premium rating compared with its peers. According to Johnson Telit has demonstrated much greater revenue velocity than the market and it has secured a larger percentage of design wins than its market share.

 

Quick facts: Telit Communications PLC

Price: 129.2 GBX

AIM:TCM
Market: AIM
Market Cap: £171.17 m
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