Filtronic_Sedgefield_60_usethis

Cash generative in FY21 despite the pandemic

Filtronic 3 August 2021 Update
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Filtronic

Cash generative in FY21 despite the pandemic

FY21 results

Tech hardware & equipment

3 August 2021

Price

11.08p

Market cap

£24m

Net cash (£m) at end May 2021 (excluding right of use property leases)

1.9

Shares in issue

214.4m

Free float

66.1%

Code

FTC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.4)

22.2

22.9

Rel (local)

(4.7)

20.8

1.4

52-week high/low

12p

7p

Business description

Filtronic is a designer and manufacturer of advanced RF communications products supplying a number of market sectors including mobile telecommunications infrastructure, public safety, defence and aerospace.

Next events

AGM

28 October 2021

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5729

Filtronic is a research client of Edison Investment Research Limited

Filtronic’s sales declined by 9% year-on-year during FY21 because of 5G roll-out delays and a slowdown in sales to the US public safety market during H121. This market began to recover during Q4. Nevertheless, the group was strongly cash generative during the year, putting it in a good position to invest in additional engineering resource and business development. This supports management’s strategy of broadening the customer base and product range.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

05/19

15.9

0.7

0.1

0.05

0.00

222

05/20

17.2

1.2

0.1

0.05

0.00

222

05/21

15.6

1.8

0.1

0.14

0.00

79.1

05/22e

18.0

2.0

0.7

0.34

0.00

33.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

H121 sales affected by COVID-19 – recovery in Q4

Group sales declined by 9% year-on-year during FY21 to £15.6m, in line with management guidance. Strong growth in defence sales partly offset a decline in sales of transceivers for 5G XHaul links and a slowdown in sales to the US public safety market during H121 as budget was diverted during the pandemic. Adjusted EBITDA increased from £1.2m in FY20 to £1.8m, also in line with management guidance. This improvement was attributable primarily to increased manufacturing efficiencies and a more favourable sales mix. Net cash (excluding IFRS 16 leases) increased from £0.4m at end FY20 to £1.9m at end FY21.

Rebound continues in FY22

We introduce FY22 estimates, which assume that the recovery noted in the critical communications markets during Q421 continues during FY22. (Maintaining the H221 run rate throughout the year would give annual revenues of £16.8m.) In addition, FY22 is likely to benefit from the £1.3m contract win from a new major UK defence customer for the supply of battlefield radio communications hardware announced in January 2021. This strong revenue growth will be accompanied by an increase in overheads as the company resumes physical meetings with potential customers and invests in additional engineering resource to support new customers and develop product for emerging communications frequencies such as W-band.

Valuation: Depends on growth trajectory post FY22

Filtronic’s share price has risen by over 20% since we initiated coverage in June 2021. Comparing Filtronic’s multiples with those of its RF specialist peers, we note that it is trading broadly in line with the sample mean with regards to both prospective EV/sales and EV/EBITDA. Our estimates show Filtronic’s revenues growing more quickly than revenues for the companies in this sample during FY22. This suggests that a premium may be justified if Filtronic is able to maintain FY22 levels of revenue growth in subsequent years by continuing to broaden its customer base and product range.

FY21 performance

Strong defence sales partly offset weakness in communications markets

Filtronic remained fully operational throughout the coronavirus lockdowns, enabling it to keep core engineering developments on track against their respective milestone delivery plans and maintain product delivery schedules. The end-markets remained reasonably robust. While there was a slowdown in sales to the US public safety market during H121, which management believes was the result of public funds being diverted to COVID-19 support measures and the lead customer experiencing difficulties in accessing sites to install equipment, demand recovered during Q421 as COVID-19-related restrictions started to ease. Sales of transceivers for 5G XHaul links decreased year-on-year, partly because the lead customer had built up buffer stock towards the end of FY20, deployment of which was slower than it had expected, partly because the switch to Filtronic’s next-generation Morpheus product was delayed because of technical challenges unrelated to the product itself. In contrast, sales to the defence and aerospace market grew by 24% year-on-year, supported by the investment in plant and machinery made during FY20, which automates processes for manufacturing electronic products containing unpackaged integrated circuits. This technique is critical for high-frequency applications. COVID-19-related travel restrictions adversely affected new business acquisition.

Group sales rose from £7.1m in H121 to £8.5m in H221. This resulted in a 9% year-on-year decline for the full year to £15.6m, which was in line with guidance given in the pre-close trading update

Improved EBITDA

Adjusted EBITDA increased from £1.2m in FY20 to £1.8m, also in line with management guidance. This improvement was attributable to increased manufacturing efficiencies, lower travel and marketing expenses and c £0.3m benefit from the UK furlough and US Paycheck Protection Program (PPP) schemes, together with a more favourable sales mix with a higher proportion of sales to the defence market where certain components are free-issued by the customer. There was a modest (£0.2m) increase in salary costs as the recruitment of additional engineering resource and reinstatement of a marketing function was offset by a reduction in the size of the manufacturing team following the investment in automation. EBITDA of £1.2m was generated in H221. Adjusted profit before tax was the same as FY20 at £0.1m, reflecting higher levels of depreciation following the prior year investments in plant and machinery and higher levels of amortisation following the launch of the new tower top amplifier and Morpheus transceiver products.

Strong balance sheet supports future investment

Net cash (net of all lease obligations except right of use property leases) increased from £0.4m at end FY20 to £1.9m at end FY21. Cash generated from operations was £2.5m. Inventory levels reduced by £0.8m during the year as the company started to ship Morpheus transceivers and worked through stock of items with long lead times and inventory that it had built up ahead of Brexit. The reduction in inventory resulted in a £1.1m drop in trade and other payables as the company worked through stock that had previously been paid for. Trade and other receivables fell by £1.6m because of the large number of E-band transceivers for Xhaul that had been shipped in Q420. Investment in capital equipment was minimal (£0.2m) because the investment in the Sedgefield site completed in FY20. Capitalised development costs were substantially lower year-on-year (£0.1m versus £0.7m in FY20) because much of the development work during the year was paid for by customers. The strong balance sheet gives Filtronic a good base from which to continue investing in additional engineering resource and business development during FY22, as well as securing component inventory to mitigate the impact of supply chain issues.

Introducing FY22 estimates

Management has not provided any formal guidance for FY22, other than noting the renewed commitment to 5G network roll-out, an anticipated recovery in investment in critical communications infrastructure and the current disruption to semiconductor supply chains. This disruption may directly affect Filtronic. In addition, since Filtronic’s products are used in customer projects deploying sub-systems from multiple vendors, if any of these suppliers is directly affected by component shortages, this may have an indirect impact on Filtronic because its customers may experience delays in completing projects. Given the uncertain economic environment, we continue to provide only one year of forecasts and present FY22 estimates for the first time. These make the following assumptions:

Revenues: we assume that the recovery noted in the critical communications markets during Q421 continues during FY22. We note that maintaining the H221 run rate throughout the year would give revenues of £16.8m. In addition, FY22 is likely to benefit from the contract win from a new major UK defence customer for the supply of battlefield radio communications hardware announced in January 2021. Final product delivery under the contract is scheduled to commence in calendar H221, so a high proportion of the revenues from this contract, which is valued at £1.3m, are likely to be recognised during FY22.

Cost of materials/sales: we model this at FY21 levels, ie 45%, although the higher proportion of work for the defence sector may push cost of materials/sales lower.

Other costs: we model an increase in staffing costs in comparison with FY21 to reflect investment in engineering, as well as an increase in marketing expenditure as COVID-19-related travel restrictions ease and the absence of any benefit from furlough or PPP schemes.

Working capital: we model a £0.5m increase in inventory as the company rebuilds levels of long lead time items to address supply issues.

Investment activity: we model £0.5m investment in equipment to support the development of W-band product for future 5G networks as E-band capacity becomes full. We also model £0.5m of capitalised R&D costs to reflect this development work.

Valuation

There are very few other listed companies specialising in high-power mmWave communications products, not just in the UK, but also across mainland Europe, Israel and North America. While this emphasises the uniqueness of Filtronic’s skill set, it makes it more difficult to create a sample of peers to use as the basis of a peer multiples comparison. We have created two sample sets. The first consists of companies that, like Filtronic, offer niche product used for transmitting data at mmWave frequencies. The second is a sample set of European companies that, like Filtronic, offer a highly differentiated technology based on hard-to-find skill sets.

Filtronic’s share price has risen by over 20% since we initiated coverage in June 2021. Comparing Filtronic’s multiples with those of its RF specialist peers, we note that it is trading broadly in line with the mean of the sample with regards to both prospective EV/sales and EV/EBITDA and at a significant premium to the mean with regards to P/E. Since several of the companies in the second sample set are not profitable yet, the data are limited. However, consensus estimates show companies in this sample growing substantially more quickly than those in the first, thus commanding higher multiples. Our estimates show Filtronic also growing more quickly than the companies in the first sample set during FY22. While we only have one year of estimates for Filtronic, the analysis suggests that if Filtronic is able to maintain the level of revenue growth we expect it to achieve in FY22 (15.5%) in subsequent years, this would merit an uplift in share price multiples. Such accelerated growth, if achieved would, we believe, be attributable to continued success in broadening the customer base and product range, as discussed in our June initiation note. We note that the proposed growth in FY22 is against an unusually weak FY21.

Exhibit 1: Peer multiples

Name

 

Market cap (£m)

EV/sales 1FY (x)

EV/EBITDA 1FY (x)

P/E 1FY
(x)

CAGR %

Aviat Networks

Microwave networking products including E-band radios

281

1.3

11.0

15.4

7.5%/3 years

Baylin Technologies

Microwave communications products up to Ka-band (26.5–40GHz)

34

0.9

49.1

N/A

7.4%/2 years

CommScope Holding Company

Microwave communications products including point-to-point antennae up to 11.7GHz and tower-mounted amplifiers

2,985

1.7

10.9

10.5

1.7%/3 years

Comtech Telecommunications

Microwave communications products including Ku-band (12–18 GHz) power amplifiers and block-up-converters

463

1.4

11.0

N/A

0.5%/3 years

Mean of RF specialists

1.3

11.0

13.0

CML Microsystems

Developer of mixed-signal, RF and microwave semiconductors for global communication markets

77.1

3.2

14.7

53.4

16.8%/2 years

Kromek Group

Supplier of detection technology for medical, security screening and nuclear markets based on CZT (cadmium zinc telluride) material

79.6

5.2

N/A

N/A

44.9%/1 year

Mynaric

Developer of free space laser communications systems for deployment on space and airborne platforms

259.2

26.2

N/A

N/A

577%/3 years

Sivers Semiconductors

Developer of RF chips and antennae for 5G systems and semiconductor-based products for optical networking, optical sensors and optical wireless communication (Li-Fi)

335.0

30.6

N/A

N/A

114%/3 years

Trackwise Designs

Developer of novel technology based on flexible printed circuits for reducing weight of wiring harnesses

52.2

4.9

51.5

N/A

90.8%/2 years

Mean of companies with highly differentiated technology

16.3

33.1

53.4

Filtronic

24

1.3

11.4

33.0

15.5%/1 year

Source: Refinitiv, Edison Investment Research. Note: Prices as at 29 July 2021.

Exhibit 2: Financial summary

Year end 31 May

£m

2019

2020

2021

2022e

INCOME STATEMENT

Revenue

 

 

15.9

17.2

15.6

18.0

EBITDA

 

 

0.7

1.2

1.8

2.0

Normalised operating profit

 

 

0.2

0.4

0.6

0.8

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

0.0

(0.6)

0.1

0.0

Reported operating profit

0.2

(0.2)

0.6

0.8

Net Interest

(0.1)

(0.2)

(0.4)

(0.2)

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

0.1

0.1

0.1

0.7

Profit Before Tax (reported)

 

 

0.1

(0.4)

0.2

0.7

Reported tax

2.1

(0.1)

(0.2)

0.2

Profit After Tax (norm)

0.1

0.1

0.3

0.7

Profit After Tax (reported)

2.2

(0.5)

0.1

0.8

Discontinued operations

(3.5)

(1.4)

0.0

0.0

Net income (normalised)

0.1

0.1

0.3

0.7

Net income (reported)

(1.3)

(2.0)

0.1

0.8

Average Number of Shares Outstanding (m)

208

211

213

214

EPS - normalised (p)

 

 

0.05

0.05

0.14

0.34

EPS - diluted normalised (p)

 

 

0.05

0.05

0.14

0.33

EPS - basic reported (p)

 

 

1.08

(0.25)

0.03

0.40

Dividend (p)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

7.8%

-9.5%

15.5%

EBITDA Margin (%)

4.2

6.8

11.4

11.2

Normalised Operating Margin

1.5

2.2

3.7

4.6

BALANCE SHEET

Fixed Assets

 

 

4.3

7.5

6.2

6.0

Intangible Assets

1.2

1.8

1.7

1.9

Tangible Assets

1.0

3.8

3.3

2.8

Investments & other

2.0

1.9

1.2

1.2

Current Assets

 

 

14.0

9.8

8.4

9.1

Stocks

2.1

2.9

2.2

2.7

Debtors

4.2

4.8

3.3

3.4

Cash & cash equivalents

2.6

2.0

2.9

3.0

Other

5.0

0.0

0.0

0.0

Current Liabilities

 

 

(7.1)

(6.0)

(3.6)

(3.2)

Creditors

(2.3)

(3.5)

(2.4)

(2.0)

Short term borrowings including lease liabilities

(0.1)

(0.7)

(0.6)

(0.6)

Other

(4.7)

(1.8)

(0.6)

(0.6)

Long Term Liabilities

 

 

(0.1)

(2.0)

(1.7)

(1.7)

Long term borrowings

(0.0)

(2.0)

(1.6)

(1.6)

Other long-term liabilities

(0.1)

0.0

(0.1)

(0.1)

Net Assets

 

 

11.0

9.4

9.4

10.2

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

11.0

9.4

9.4

10.2

CASH FLOW

Op Cash Flow before WC and tax

0.7

1.2

1.8

2.0

Working capital

2.2

(2.4)

1.1

(1.0)

Exceptional & other

(2.7)

(2.7)

(1.0)

0.0

Tax

(0.1)

1.2

0.5

0.2

Net operating cash flow

 

 

(0.0)

(2.6)

2.5

1.2

Capex (including capitalised R&D)

(1.0)

(1.2)

(0.4)

(1.0)

Acquisitions/disposals

0.0

3.7

0.0

0.0

Net interest

(0.1)

(0.3)

(0.2)

(0.2)

Equity financing

0.1

0.3

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Net Cash Flow

(1.0)

(0.2)

1.9

0.1

Opening net debt/(cash)

 

 

(3.6)

(2.5)

0.7

(0.8)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.0

(3.0)

(0.4)

(0.0)

Closing net debt/(cash) including lease liabilities

 

 

(2.5)

0.7

(0.8)

(0.8)

Property lease liabilities

1.1

1.2

1.2

Closing net debt/(cash) excluding lease liabilities

 

 

(2.5)

(0.4)

(1.9)

(2.0)

Source: Company accounts, Edison Investment Research


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This report has been commissioned by Filtronic and prepared and issued by Edison, in consideration of a fee payable by Filtronic. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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