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Improved H2 lifts earnings and year-end net cash

Filtronic 17 June 2021 Update
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Filtronic

Improved H2 lifts earnings and year-end net cash

Post-close trading update

Tech hardware & equipment

17 June 2021

Price

11.75p

Market cap

£25m

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

30.6

34.3

51.6

Rel (local)

28.1

27.4

28.1

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 event

FY21 results

3 August 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 post-close trading update notes that management expects improved trading during H221 to result in FY21 revenues of c £15.6m, in line with our estimate. It expects a favourable sales mix at higher margins to generate c £1.8m EBITDA, which is slightly ahead of our previous estimate.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

05/18

21.6

3.6

3.1

1.52

0.00

7.7

05/19

15.9

0.7

0.1

0.05

0.00

N/A

05/20

17.2

1.2

0.1

0.05

0.00

N/A

05/21e

15.6

1.8

0.2

0.07

0.00

N/A

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

Easing of lockdown helps US public safety sales

Filtronic remained fully operational throughout the coronavirus lockdowns and its end-markets remained reasonably robust. Importantly, demand for critical communications products to the public safety market in the US recovered during Q421 as COVID-19-related delays to new installations and system upgrades started to ease. Management expects the resultant improvement in trading during H2 after a softer H1 to deliver FY21 revenues of c £15.6m (FY20: £17.2m). This is in line with our previous £16.0m estimate. Moreover, management expects that a favourable sales mix at higher margins will deliver EBITDA of £1.8m (FY20: £1.2m), which is slightly ahead of our previous £1.6m estimate. Cash at end FY21 was £2.9m (end H121: £1.6m). Net cash (net of all lease obligations except right of use property leases) at end FY21 was £1.9m (end H121: £0.4m). This strong balance sheet gives Filtronic a good base to continue investing in additional engineering resource during FY22, as well as securing component inventory to mitigate the impact of supply chain issues.

Demand in all three sectors favourable going forward

While we will not be introducing FY22 estimates until the FY21 results are announced in August, we note that demand for Filtronic’s products appears robust in each of the three sectors served: public safety communications, aerospace and defence and mobile communications backhaul links. However, 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.

Valuation: Leveraged model supports share price

Comparing Filtronic’s multiples with those of its RF specialist peers, we note that it is trading at a premium to the mean of the sample on all metrics. This premium can be justified given Filtronic’s surplus manufacturing capacity, which means that indirect costs would not increase as quickly as revenues if there were to be significant sales growth. This could potentially lead to EBITDA margins that are higher than the mean for the sample, justifying a share price premium.

Changes to estimates

We have adjusted our FY21 estimates to reflect management’s expectations as well as higher levels of capitalised R&D.

Exhibit 1: Revisions to FY21 estimates

£m

FY20

FY21e

Actual

Old

New

Change

Revenues

17.2

16.0

15.6

-2.5%

EBITDA

1.2

1.6

1.8

9.6%

EBITDA margin

6.8%

10.3%

11.6%

12.4%

Normalised PBT

0.1

0.3

0.2

-37.0%

Normalised basic EPS

0.05

0.12

0.07

-37.0%

Dividend per share

0.00

0.00

0.00

0.0%

Net debt/(cash) excluding lease liabilities

(1.8)

(1.4)

(1.9)

34.4%

Source: Edison Investment Research

Valuation

Exhibit 2: Peer multiples

Market cap
(£m)

EV/Sales 1FY (x)

EV/EBITDA 1FY (x)

P/E 1FY
(x)

EBITDA margin 1FY (%)

Aviat Networks

312

1.5

12.4

16.8

11.7

Baylin Technologies

32

0.8

46.5

(4.5)

1.8

CommScope Holding Company

3,177

1.7

11.0

11.1

15.3

Comtech Telecommunications Corp

407

1.2

10.0

(7.5)

12.3

Mean

1.3

11.1

14.0

13.1

Filtronic

25

1.7

14.4

167.9

11.6

Source: Refinitiv, Edison Investment Research. Note: Prices as at 14 June 2021.

Filtronic’s share price has increased by more than 30% since we initiated coverage on the stock in early June. Comparing Filtronic’s multiples with those of its RF specialist peers, we note that it is trading at a premium to the mean of the sample on all metrics. As discussed in our initiation note, this premium can be justified given Filtronic’s surplus manufacturing capacity. While we do not have any estimates yet for FY22, this surplus manufacturing capacity means that indirect costs would not increase as quickly as revenues if there were to be significant sales growth during the year. Moreover, the establishment of a network of sales agents in the US, mainland Europe and South Korea should help keep the increase of indirect costs relatively low as sales in these regions increase. Provided that indirect costs are kept under control, revenue growth of 10% or more would result in an improvement in EBITDA margin (see Exhibit 3). Depending on the scale of EBITDA margin improvement, Filtronic justifies trading on EV/Sales and EV/EBITDA multiples that are at a premium to the mean for our sample.

Exhibit 3: FY22 EBITDA margin (%) as a function of revenue and cost development

 

Year-on-year revenue growth

5.0%

10.0%

15.0%

20.0%

Incremental indirect costs as a % of additional sales

3.0%

11.2%

13.7%

15.9%

17.9%

5.0%

9.3%

11.8%

14.1%

16.2%

7.0%

7.4%

10.0%

12.4%

14.6%

Source: Edison Investment Research

Exhibit 4: Financial summary

31-May

£m

2018

2019

2020

2021e

INCOME STATEMENT

Restated

Revenue

 

21.6

15.9

17.2

15.6

EBITDA

 

3.6

0.7

1.2

1.8

Normalised operating profit

 

3.2

0.2

0.4

0.6

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

0.0

0.0

(0.6)

0.0

Reported operating profit

3.2

0.2

(0.2)

0.6

Net Interest

(0.1)

(0.1)

(0.2)

(0.4)

Exceptionals

(0.5)

0.0

0.0

0.0

Profit Before Tax (norm)

 

3.1

0.1

0.1

0.2

Profit Before Tax (reported)

 

2.7

0.1

(0.4)

0.2

Reported tax

0.1

2.1

(0.1)

0.0

Profit After Tax (norm)

3.1

0.1

0.1

0.2

Profit After Tax (reported)

2.7

2.2

(0.5)

0.2

Discontinued operations

(1.5)

(3.5)

(1.4)

0.0

Net income (normalised)

3.1

0.1

0.1

0.2

Net income (reported)

1.2

(1.3)

(2.0)

0.2

Average Number of Shares Outstanding (m)

207

208

211

214

EPS - normalised (p)

 

1.52

0.05

0.05

0.07

EPS - diluted normalised (p)

 

1.49

0.05

0.05

0.07

EPS - basic reported (p)

 

1.31

1.08

(0.25)

0.07

Dividend (p)

0.00

0.00

0.00

0.00

Revenue growth (%)

N/A

-26.3%

7.8%

-9.2%

EBITDA Margin (%)

16.8

4.2

6.8

11.6

Normalised Operating Margin

14.8

1.5

2.2

3.9

BALANCE SHEET

Fixed Assets

 

6.3

4.3

7.5

6.5

Intangible Assets

3.9

1.2

1.8

1.6

Tangible Assets

1.4

1.0

3.8

3.0

Investments & other

1.0

2.0

1.9

1.9

Current Assets

 

12.3

14.0

9.8

8.9

Stocks

2.1

2.1

2.9

2.4

Debtors

6.4

4.2

4.8

3.7

Cash & cash equivalents

3.8

2.6

2.0

2.9

Other

0.0

5.0

0.0

0.0

Current Liabilities

 

(6.1)

(7.1)

(6.0)

(3.8)

Creditors

(5.1)

(2.3)

(3.5)

(1.3)

Short term borrowings

(0.1)

(0.1)

(0.7)*

(0.7)*

Other

(1.0)

(4.7)

(1.8)

(1.8)

Long Term Liabilities

 

(0.3)

(0.1)

(2.0)

(2.2)

Long term borrowings

(0.1)

(0.0)

(2.0)*

(2.2)*

Other long-term liabilities

(0.2)

(0.1)

0.0

0.0

Net Assets

 

12.2

11.0

9.4

9.5

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

12.2

11.0

9.4

9.5

CASH FLOW

Op Cash Flow before WC and tax

3.6

0.7

1.2

1.8

Working capital

(0.7)

2.2

(2.4)

(0.5)

Exceptional & other

(1.2)

(2.7)

(2.7)

0.0

Tax

0.1

(0.1)

1.2

0.0

Net operating cash flow

 

1.8

(0.0)

(2.6)

1.3

Capex

(1.0)

(1.0)

(1.2)

(0.3)

Acquisitions/disposals

0.0

0.0

3.7

0.0

Net interest

(0.1)

(0.1)

(0.3)

(0.4)

Equity financing

0.0

0.1

0.3

0.0

Dividends

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

Net Cash Flow

0.7

(1.0)

(0.2)

0.6

Opening net debt/(cash)

 

(2.6)

(3.6)

(2.5)

0.7

FX

0.0

0.0

0.0

0.0

Other non-cash movements

0.3

0.0

(3.0)

0.0

Closing net debt/(cash) including lease liabilities

 

(3.6)

(2.5)

0.7

0.0

Lease liabilities

2.5

1.9

Closing net debt/(cash) excluding lease liabilities

 

(3.6)

(2.5)

(1.8)

(1.9)

Source: Company data, Edison Investment Research. Note: *Including lease liabilities.


General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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

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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

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

General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

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.

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

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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