Set top box maker Pace has been boosted by hopes of further acquisitions and growth from its networking business.
Analysts at Liberum raised their recommendation from hold to buy, helping lift its shares 9.4p to 346.4p. Analyst Eoin Lambe said the market was undervaluing the company’s set top box business, despite fears the business was being overtaken by new technology such as streaming services. He said:
Pace’s core set-top box market is ex-growth but it won’t completely disappear. Aurora, Pace’s networking business is delivering strong growth and we value this business at $560m [36% of Pace’s market capitalisation]. Investors are therefore getting Pace’s set top box business at just 6 times PE which is too cheap. Pace trades at a discount to its closest peer Arris on all metrics which we don’t believe is justified.
On the set top box business, he said:
The fear for Pace is that the emergence and increased content available on over-the-top [internet] services could reduce the demand for traditional set-top boxes. Secondly there is a risk that we are at peak in-home capital expenditure as functionality that was traditionally incorporated within set-top boxes (tuners, hard-disk drives) moves to the cloud and reduces the average selling prices of in-home devices.
While these risks are real, we believe they are widely understood and more than incorporated into Pace’s current valuation.
We also believe that while in-home capital expenditure, especially in the US could have peaked, a central hub/device will always be required to route data around the home meaning that Pace’s market may decline but will not disappear altogether.
Lamb said Pace could use its strong free cash flow to make further acquisitions in the wake of its purchase of Aurora for $323.5m in October 2013. He said:
Under the current management team Pace has acquired Aurora which proved to be a very good acquisition. We are slightly surprised that management hasn’t been more acquisitive to date. We believe potential acquisitions fall into the following categories:
Software assets but these could be very expensive
Adjacent areas such as connected home. Again could prove to be expensive given the interest in this area
Networking assets similar to Aurora. This is our preferred option
Acquiring a competitor to gain scale. Potential targets include Technicolor’s Connected Home business or Cisco’s Service Provider Video business. While these may be very cheap we don’t believe that doubling down on a structurally declining market is wise. Of these Cisco would be our preferred play as it has strong technology and is US based making any headcount reductions easier.
