Mackie Research lowers price target on Spectra7, maintains buy

A disappointing quarter means expectations need to be reset on Spectra7 Microsystems (Spectra7 Microsystems Stock Quote, Chart, News: TSXV:SEV), says Mackie Research Capital analyst Nikhil Thadani.

This morning, Spectra7 reported that, owing to lower production ramp-ups of current customers, it expects third quarter revenue will come in at between (U.S.) $1-million and $1.3-million far lower than the street consensus of (U.S.) $3.8-million, The company also announced that, effective today, Raouf Halim would succeed the late Tony Stelliga as CEO.

“I am delighted to join Spectra7 at this exciting time in its development,” said Halim. “Spectra7 delivers cutting-edge technologies at the core of AR/VR, data centre infrastructure and multiple other important markets just as they move into their broad adoption phase. I am committed to working alongside Spectra7’s leaders, talented employees and customers to build upon this foundation and enhance long-term shareholder value by leading the company in its next growth phase.”

Thadani says he still likes Spectra7, but believes that the story has been pushed back, timewise.

“We now model 2016 volume shipments roughly in 2017,” says the analyst. “We have reduced our Virtual Reality & Augmented Reality headset shipments by ~40% in 2016 and 2017, driven by this morning’s negative Q3 pre-announcement. Our target is only down 20% as our target is now based on a Q4/17 run-rate (vs. previous C2017). We believe SEV stock provides a vehicle to play the emerging & exciting Virtual and Augmented Reality ecosystem and is likely to remain catalyst drive in the near-term. That said, we need more comfort around revenue/shipment ramp. We expect investor expectations to be re-established after a relative and understandable communications vacuum post the unfortunate passing of Tony Stelliga in May.”

In a research update to clients today, Thadani maintained his “Buy” rating on Spectra7, but lowered his one-year price target from $1.00 to $0.80. , implying a return of 100 per cent at the time of publication.

Thadani expects Spectra7 will generate negative EBITDA of $7.9-million on revenue of $9.7-million n fiscal 2016, numbers he expects will improve to negative EBITDA of $700,000 on revenue of $20.4-million the following year.