First Berlin – ADVA Optical Networking SE Research Update (10/01/2022)

First Berlin Equity Research has published a research update on ADVA Optical Networking SE (ISIN: DE0005103006). Analyst Simon Scholes upgraded the stock to BUY and increased the price target from EUR 14.40 to EUR 18.00.

The proposed merger of ADVA and ADTRAN brings together two fibre optic edge networking specialists in the second year of an edge network investment boom. The shift towards home-based work and leisure caused by the COVID-19 pandemic acted as the initial trigger for accelerating investment at the network edge. US and European government funding of USD190bn in broadband infrastructure investment, the roll-out of 5G, the growth of the Internet of Things, the replacement of Huawei infrastructure, and the emergence of the metaverse look set to ensure that the boom continues without interruption until at least the end of this decade. ADVA and ADTRAN are both edge networking specialists but ADTRAN is focused on the ?first mile? of the network (from the end-user's perspective) with state-of-the art solutions for residential access, while ADVA offers first-mile solutions for enterprise users and is strong in the ?second mile? which links the local to the core network. There is little product overlap between the two companies. Together ADVA and ADTRAN will have a complementary product range and an R&D budget of USD240m. The latter will allow the merged entity to achieve strategic vendor status with a larger number of customers than would have been possible for the two companies in isolation. We see government broadband investment, the Huawei replacement opportunity and deeper market penetration doubling the combined entity's total addressable market to USD13.7bn compared with USD7.1bn previously addressable by ADVA and ADTRAN on a standalone basis. In addition, management expects the merger to generate USD52m in cost synergies and USD60-120m in revenue growth synergies. Under the merger's proposed terms, each ADVA share will be exchanged for 0.82x the value of each ADTRAN share. The Acceptance Period for ADVA shareholders ends on 12 January. On the assumption that the merger goes ahead under the existing terms, and based on a DCF valuation of the combined entity, we value the ADVA share at €18.0 (previously: €14.4). Our rating is Buy (previously: Add) and we recommend ADVA shareholders accept the merger offer.