First Berlin – ADVA Optical Networking SE Research Update (27/07/2020)

First Berlin Equity Research has published a research update on ADVA Optical Networking SE (ISIN: DE0005103006). Analyst Simon Scholes reiterated his ADD rating and increased the price target from EUR 7.10 to EUR 8.00.

Q2 results were above expectations: Revenues rose 8.9% y-o-y to €145m (consensus: €141.0m; Q2/19: €133.2m) and were also up 9.3% on the Q1/20 figure of €132.7m. Proforma EBIT came in at €10.1m (consensus: €2.9m; Q2/19: €4.3m) and was back in the black after a loss of €1.7m in Q1/20. Reduced manufacturing capacity at Chinese manufacturing hubs meant that €10m of revenues bookings which would normally have been made in Q1/20 were delayed. Supply to ADVA from China was restored and this €10m of revenue was booked in Q2/20. However, interruptions elsewhere in the company's supply chain delayed the booking of a further €15m in revenues in Q2/20. Underlying revenue growth between Q1/20 and Q2/20 was therefore 5.1% (€132.7m + €10.0m) / (€145.0m – €10.0m + €15.0m). ADVA's communication service provider (CSP) and internet content provider (ICP) clients, who between them account for around 75% of group revenues, were the main drivers of growth. Increasing order activity from these customer groups was prompted by rising demand for bandwidth due to the growing importance of remote working, media streaming and online gaming during the pandemic. The end-June order backlog was up y-o-y and management expect a further rise in sales in the current quarter. While the short-term outlook is good, uncertainty as to the future development of the SARS-CoV-2 crisis has caused ADVA to refrain from giving full year guidance. Our view is that SARS-CoV-2 will continue to accelerate demand for bandwidth. We expect growing spending from CSP and ICP customers to cushion softening investment from private enterprises (which account for ca. 25% of group revenues). We have revised up our forecasts on the strength of better than expected Q2/20 numbers and the prospect of further sequential revenue growth in Q3/20. Our new price target is €8.00 (previously: €7.10). We maintain our Add recommendation.