Insider: heavy buying after share slump at FTSE 250 tech firm

A second sharp drop in value had directors rushing to buy shares in this £1 billion company, while latest results prompted a big buy at a successful small-cap firm.

A three-year low for FTSE 250-listed Spirent Communications (LSE:SPT) has been followed by a £200,000 flurry of boardroom share purchases in support of the 5G testing firm.

Chief executive Eric Updyke and three other directors boosted their holdings after shares slid 14% on the company’s results-day guidance that revenues are likely to be slightly lower this year amid poor demand visibility.

• Invest with ii: Open an ISA | ISA Investment Ideas | Transfer a Stocks & Shares ISA

Spirent shares have fallen by a third so far in 2023 and now trade on 14 times forward earnings, the lowest valuation multiple of the last eight years and down from an historic average closer to 18 times.

The shares closed last week at 177.6p, which compares with 2020’s post dotcom peak above 300p, after investors rallied to the potential of Spirent’s testing and assurance work for a new generation of technologies ranging from 5G and cloud to autonomous vehicles.

The results on Tuesday showed the order book up 7% to $288.1 million (£239.4 million) and that the company overcame industry-wide cost inflation to grow profits for a sixth successive year. The final dividend for payment in May is up 13% to $4.94 cents, equivalent to 4.12p.

Updyke expects a more challenging first half of 2023 as customers delay investment decisions, but remains encouraged by the structural growth characteristics of Spirent’s key markets.

The current uncertainty has impacted Spirent's lifecycle service assurance division, which is involved in the lab testing of 5G mobile core networks, cellular and wi-fi devices. Its other division of Networks & Security develops test methodologies, tools and services for virtualised networks, cloud and proactive security validation.

The company said: “We have proactively engaged with our customers and the feedback reiterates their intention to continue to develop and implement their 5G infrastructure, and we therefore expect momentum to improve in the second half of the year.”

Canaccord Genuity’s reduced forecasts now assume a 9% year-on-year revenue decline in the first half of 2023 followed by a 2% recovery against easier second half comparatives.

However, the broker switched to a “speculative buy” recommendation and price target of 250p, pointing out the historic low valuation and upside optionalities of a strong balance sheet and potential takeover interest made the risk/reward highly attractive.

It added: “Having covered network equipment and other cyclical tech sectors for some time, we are big fans of the contrarian mantra to 'buy when there's blood in the streets' - i.e. the time to buy names like Spirent is when demand hits a cyclical low.”

• ‘High risk? I don’t see it that way’: the investment secrets of an ISA millionair
• 2023 Investment Outlook: stock tips, forecasts, predictions and tax changes

Analysts at Jefferies have a price target of 340p, believing that margin improvement and lack of cyclicality in the Networks & Security division positioned Spirent to come out even stronger from its current weak patch.

Updyke spent £40,200 on shares at a price of 178.6p on Friday, with non-executive director Jonathan Silver also making an investment worth £53,800 on the same day. Fellow non-exec Gary Bullard bought on Tuesday in dealings worth £55,540 at around 183.6p, with a £50,000 purchase connected to chair Sir Bill Thomas taking place on Thursday at 182.3p.

Quick off the mark with maiden purchase

The new boss of SIG (LSE:SHI) has staked £350,000 in support of the insulation and roofing materials specialist delivering a 5% operating margin target.

Gavin Slark, who joined last month after 11 years at the helm of building materials supplier Grafton, made his maiden purchase of shares shortly after Wednesday’s annual results revealed a big jump in underlying profits to £51.6 million.

Slark’s purchase was made at 38.9p, which compared with 29.2p at the start of the year and 119p in 2020.

Broker Liberum upped its price target from 41p to 50p and said Slark looked to be the right choice to deliver the 5% goal, having created significant value for shareholders of Grafton.

The City firm said: “His track record and expertise in building materials distribution suggest he is a credible candidate to restore the profitability of SIG back to historic levels.”

The margin improved to 2.9% from 1.8% in the final year under former boss Steve Francis, who oversaw a significant improvement in SIG’s financial position compared with 2020.

The group, which employs more than 7,000 people and serves customers across the UK, France, Germany, Ireland, Benelux and Poland, returned to positive free cash flow last year but is not yet paying a dividend.

• The simple maths that can make you an ISA millionaire
• Five AIM stocks for an inheritance tax ISA in 2023
• ISA ideas: alternatives to the most-popular funds and trusts

Liberum noted that the operating margin outside the UK was now the highest since the financial crisis at 4.1% and the UK figure improved from 2.4% to 2.8%.

Markets continue to vary across SIG’s operations, with Slark expecting weaker demand conditions overall during 2023 but supportive trends in input price inflation.

Graeme owns a small amount of shares in Spirent