First Berlin – ADVA Optical Networking SE Research Update (27/04/2021)

First Berlin Equity Research has published a research update on ADVA Optical Networking SE (ISIN: DE0005103006). Analyst Simon Scholes reiterated his BUY rating and increased the price target from EUR 12.50 to EUR 13.00.

Abstract
ADVA's Q1/21 sales climbed 8.9% to €144.5m (FBe: €145.5m; Q1/20: €132.7m) while proforma EBIT came in at €12.9m (FBe: €10.9m; Q1/20: €-1.7m). ADVA has never recorded higher sales, profitability, order intake and cash generation during the first quarter of its financial year. In Q1/21, the company continued to benefit from the increased pace of digitisation due to the pandemic as well as the ongoing shift in the sales mix towards higher margin products/customers and software and services. In Q1/21 software and services accounted for 26% of sales, up from 20% in FY2019. ADVA thus appears to be well on track to grow this contribution to the 30%targeted for 2023. ADVA sees the outlook for the current quarter as ?very good?. Full-year 2021 guidance given at the end of February was for sales of €580m-€610m and a proforma ?EBIT margin of 6%-9%. ADVA do not expect possible delivery delays stemming from the current semiconductor shortage to jeopardise the achievement of the full-year sales target which remains unchanged. In the Q1 report management raised the upper end of proforma EBIT margin guidance to 10% while the lower end of the range is unchanged at 6%. In our view this reflects on the one hand a faster than expected shift towards a higher margin product mix and on the other uncertainty as to the cost impact of the semiconductor shortage. Notwithstanding the semiconductor shortage, which we expect to be of relatively short duration, we continue to model a sales CAGR of 9.7% over the five year period to end 2025 driven in large part by increasing network edge investment on ADVA's carrier/NFV (network functions virtualisation) and network synchronisation technology segments (ca. 30% of 2020 sales). ADVA's margins are higher in these segments than in optical networking (ca. 70% of 2020 sales). We expect their faster growth to widen ADVA's proforma operating margin from 6.0% in 2020 to 10.1% in 2025. We expect to raise this figure once ADVA has demonstrated it can successfully negotiate the semiconductor shortage. We have raised the price target to €13.00 (previously: €12.50) to reflect a reduction in our tax charge forecasts. We maintain our Buy recommendation.