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Northland Capital sees Telit debt-free in 2011, retains target price

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Broker Northland Capital Partners said that Telit Communications’ (LON:TCM) debt level is much better than forecast, while retaining its outperform rating for the stock and predicting that its 2011 net debt will be reduced to zero.

The broker note was issued in response to today’s trading update, in which the AIM-listed machine to machine (M2M) communications specialist said that it is expecting full-year revenues to have risen 48 percent year-on-year and that debt was reduced to US$7.8 million, down from US$10.4 million in 2009 and $15.5 million in the first half of 2010.

Northland pointed out that the debt position was substantially lower than a projected US$16.5 million, reflecting improvements in payment terms to the company’s Chinese manufacturing partner.

Under its previous manufacturing agreement in Italy, payment terms were the end of the month plus 90 days, or 105 days on average. China was initially net 60 days from the invoice/delivery date.

Hence although China offered considerable cost savings of about 20% and increased capacity, Telit was having to fund an extra 45 days of working capital.

The Chinese terms have been extended to 75 days.

“Given the extended payment terms, we now expect FY11 net debt will reduce to zero,” said Northland, which has previously forecast a net debt of US$13.5 million.

“Telit uses low cost invoice advances and factoring of receivables to fund working capital but extended payment terms will reduce its cost of working capital and provide increased flexibility,” concluded Northland.

The broker also retained its price target of 125 pence for the stock, which represents a substantial premium to the current share price of 73.5 pence.

Shares in Telit have been on the rise over the past six months, climbing from below 40 pence in August to over 70 pence, at one point reaching 80 pence.

Quick facts: Telit Communications PLC

Price: 127.6 GBX

AIM:TCM
Market: AIM
Market Cap: £169.31 m
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