AVNW - Aviat Networks - A Partial Re-Rating

2023-04-30 06:08:24 ET

Summary

• Aviat Networks traded at a very non-demanding valuation multiple at $25 last summer.
• The company announced a hostile deal for Ceragon at the time, yet the hostile nature and relatively large transaction created a lot of uncertainty.
• After the deal was turned down, Aviat continued to show solid growth, triggering a small re-rating ever since.

In the summer of 2022, I concluded that I was not connected yet to shares of Aviat Networks ( AVNW ) . This came after the company has been doing quite well on its own following better margin performance, resulting in a non-demanding valuation. This steady base was however interfered by a large and riskier deal potential deal for Ceragon, creating quite some uncertainty for investors to come.

Networking Business

Aviat is a pure play wireless microwave transport equipment, software and service provider. The Austin-based company provides such solutions for radios, routers, software and services. These solutions are used in 5G, private networks, mobile and rural broadband applications, with most of the revenues generated in North America.

The company generated $275 million in sales in 2021, after posting double digit sales growth that year. The company reported GAAP operating profits of $27 million, with EBITDA reported at $33 million.

With exception to a boom during the dotcom crisis, shares have been trading range bound between just $5 and $10 per share between 2015 and 2020 (amidst lackluster operating performance), as shares hit a peak around $40 during the pandemic. Ever since shares have largely traded between $25 and $40, now trading hands at $33 per share.

With shares trading at $30 last summer, the 12 million shares outstanding and a $48 million net cash position worked down to an operating asset valuation around $300 million. This was equal to about 1 times sales and with earnings power trending at $2 per share (with net cash reported at $4 per share) the resulting 13 times multiple was non-demanding.

The company guided for modest sales growth in 2022 and was delivering on this, as the company announced a big $235 million deal to acquire Ceragon Networks. I specifically say the word announce, as Aviat offered a 51% premium over the share price, but the hostile nature made that deal uncertainty was very high.

The deal would be a game changer as Ceragon posts sales of around $300 million, at par with Aviat, although its EBITDA margins come in at just half the Aviat numbers, yet Ceragon saw a huge $36 million in synergies.

While I liked Aviat on a standalone basis, a hostile deal for a struggling target introduced some risks, although the (promised) synergy target was interesting as well.

Steady

Since the summer, shares of the company have been trading range bound between $25 and $40 per share, now trading at $33 per share. In August, the company revised its offer to acquire Ceragon to $3.08 per share, yet that improved offer was rejected as well.

In August, the company posted its fiscal 2022 results. Full year sales rose 10% to $303 million as GAAP operating earnings rose further to $29 million with GAAP earnings of $21 million, or $1.79 per share, held back a bit due to a higher tax rate. In anticipation of the Ceragon deal, the company increased net cash holdings to $48 million. The company did not provide an outlook for 2023, nor did it comment on its further intentions to acquire Ceragon.

In November, the company posted a solid 11% increase in first quarter 2023 sales to $81 million. Operating earnings fell a bit to $4 million amidst higher restructuring charges and perhaps some costs related to a potential Ceragon deal. Net cash fell to $23 million as a result of the bolt-on deal for Redline and some related expenses.

Second quarter results, as released in February, showed that revenues rose as much as 16% to $90 million, with GAAP operating profits flattish around $9 million, with GAAP earnings coming in around half a dollar.

And Now?

The reality is that Aviat continues to do just fine. Despite the attention directed away from the business following its intention to acquire Ceragon, the underlying business does well with double digit revenue growth and earnings realistically trending around $2 per share.

The bolt-on deal for Redline aids in accelerating growth, but has depleted net cash to about $2 per share, as the current $33 valuation implies that the core business is valued at around 15 times earnings. This is the valuation for an unleveraged business.

Since the summer shares have risen from $25 to $33, marking a very decent 30-35% gain in the period of less than a year. While the dirt cheap valuation has risen a bit to a 15 times multiple, which is still modest, I am less upbeat than I was last summer, purely for valuation reasons, although that quite some news on the Ceragon front and continued growth might reveal potential for shares to rise further over time.

For further details see: