Astaire Securities positive on Telit Communications as M2M market consolidation continues

Astaire Securities has published a note on Telit Communications (AIM: TCM), saying that the ongoing consolidation in the sector was favourable for the M2M (machine to machine) communications specialist in view of the recent acquisition of Cinterion Wireless Modules by Gemalto, which it said showed the attraction of the M2M market as companies “looked to attach more things to the internet".
Cinterion, which is the market leader in M2M space with a 20% share, was acquired for €163 million compared to its 2009 revenues of €145 million and EBIT of €4 million.
Cinterion Wireless Modules GmbG had filed for bankruptcy and financial reorganisation under the German courts in March as it sought refinancing of its considerable debt levels that amount to €180 million. The bidding process started when its largest creditor EQT reportedly made an approach for the company.

The acquisition is expected to be immediately accretive to Gemalto’s EPS and should contribute c. €20 million of operating profit.  Cinterion reported revenue growth of 40% for 2009 with expected growth of over 10% in 2010.
Astaire commented that the acquisition showed the attraction of the M2M market with growth across multiple sectors, including smart metering and telematics. The consideration of 1x annual sales compares favourably with Telit’s current rating, with a market cap/FY10 sales ratio of 0.4x and an EV (enterprise value)/FY10 sales ratio of 0.6x.

“We would also flag that Telit has been consistently gaining market share as previous designs wins come through. Further consolidation in the sector is to be expected,” added Astaire.
Earlier this month, Telit signed an agreement with Bartolini After Market Electronics Services s.r.l. (BAMES), to gain full control of the Telit s.r.l subsidiary. The deal represented the unwinding of a cross-shareholding agreement between the companies, following the successful relocation of Telit’s manufacturing to China. Astaire then said that the relocation to China offered a 20% reduction in costs, and has increased manufacturing capacity.
Astaire emphasised that, whilst the company’s share price has performed well, rising 40.4% in 2010, the broker's rating for 2011 - the first full-year under the Chinese manufacturing arrangement - was “still undemanding for a leading player in a growth market.”
Telit has been gaining increasing sales momentum for its range of M2M communications modules in recent months. The company landed a new contract in May, to supply M2M modules for new Audi infotainment systems.