Filtronic — Recovery continues throughout H222

Filtronic (AIM: FTC)

Last close As at 19/04/2024

GBP0.33

−1.80 (−5.14%)

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Research: TMT

Filtronic — Recovery continues throughout H222

Filtronic’s post-close trading update notes that FY22 revenues will be broadly in line with market expectations, rising by 10% y-o-y to £17.1m. In addition, adjusted EBITDA will be materially ahead of market expectations at over £2.7m, mainly reflecting a higher-than-expected proportion of defence revenues. We adjust our FY22 estimates accordingly and leave our FY23 estimates unchanged.

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Written by

TMT

Filtronic

Recovery continues throughout H222

Trading update

Tech hardware and equipment

20 June 2022

Price

9.44p

Market cap

£20m

Net cash (£m) at end May 2022 (excluding right of property leases)

3.1

Shares in issue

214.8m

Free float

66.1%

Code

FTC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(12.2)

(14.3)

(23.4)

Rel (local)

(6.1)

(9.0)

(19.7)

52-week high/low

£12.75

£9.00

Business description

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

Next event

FY22 results

2 August 2022

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 FY22 revenues will be broadly in line with market expectations, rising by 10% y-o-y to £17.1m. In addition, adjusted EBITDA will be materially ahead of market expectations at over £2.7m, mainly reflecting a higher-than-expected proportion of defence revenues. We adjust our FY22 estimates accordingly and leave our FY23 estimates unchanged.

Year end

Revenue (£m)

EBITDA
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

05/20

17.2

1.2

0.1

0.05

0.00

188.8

05/21

15.6

1.8

0.1

0.14

0.00

67.4

05/22e

17.1

2.7

1.5

0.67

0.00

14.1

05/23e

19.0

2.1

0.9

0.42

0.00

22.5

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

Recovery in customer demand sustained

Filtronic’s 5G XHaul transceiver sales picked up in Q222 when the supply chain issue was resolved, and remained at a higher level throughout H222. Demand from the aerospace and defence market was resilient, with Filtronic benefitting from follow-on orders for development programme wins secured during FY21. However, while end-user demand for critical communications equipment remained strong, Filtronic’s customer was adversely affected by supply chain issues, which restricted its ability to build complete solutions, resulting in some orderbook rescheduling.

Investing for further growth in FY24 and FY25

Our FY23 estimates are underpinned by a growing orderbook for 5G XHaul transceivers, and we leave them unchanged. Since gross margins are likely to be lower year-on-year in FY23 because of the lower proportion of defence orders and overheads are likely to be higher reflecting the investment in radio frequency (RF) engineering and direct sales during FY22, we model a year-on-year drop in EBITDA (but an increase versus FY21), although revenue growth is modelled at 11%. Management intends that this investment will result in stronger revenue and profit growth during FY24 and FY25 as the group diversifies into adjacent markets such as 5G test equipment, private low-latency links and broadband communications networks based on networks of multiple high altitude platform stations and low earth orbit satellites.

Valuation: Premium for stronger growth

Comparing Filtronic’s multiples with those of its specialist RF peers, we note it is trading broadly in line with the sample mean for prospective EV/sales and EV/EBITDA and at a premium for P/E multiples. However, our estimates show Filtronic’s revenues growing more quickly than those for most of the companies in this sample during FY22 and FY23. This gives it a growth trajectory closer to the companies in our sample offering a highly differentiated technology, which trade on higher multiples, suggesting a premium may be justified.

Changes to estimates

We summarise our revised estimates in Exhibit 1.

Exhibit 1: Revised estimates

Year end May (£m unless stated)

FY21

FY22e

FY23

Actual

Old

New

Change

Old

New

Change

Revenues

15.6

17.4

17.1

-1.8%

19.0

19.0

0.0%

EBITDA

1.8

2.0

2.7

35.3%

2.1

2.1

0.0%

EBITDA margin (%)

11.4%

11.6%

15.9%

37.8%

11.0%

11.0%

0.0%

Normalised PBT

0.1

0.8

1.5

85.5%

0.9

0.9

0.0%

Normalised basic EPS (p)

0.14

0.40

0.67

67.8%

0.42

0.42

0.0%

Dividend per share (p)

0.00

0.00

0.00

N/A

0.00

0.00

N/A

Net debt/(cash)

(1.9)

(2.3)

(3.1)

32.7%

(2.7)

(3.4)

26.4%

Source: Edison Investment Research

Valuation

There are very few other listed companies specialising in high-power mmWave (30–300GHz) 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 therefore created two sample sets. The first consists of companies that, like Filtronic, offer niche products 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.

Exhibit 2: Peer multiples

Name

Market cap (£m) 

EV/Sales 1FY (x)

EV/Sales 2FY (x)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

PE

1FY (x)

PE

2FY (x)

CAGR* (%)

Aviat Networks

237

0.9

0.8

6.8

6.4

9.5

8.9

6.6%

Baylin Technologies

27

0.6

0.6

(190.1)

8.8

(2.4)

(4.2)

12.3%

CommScope Holding Company

1,300

1.3

1.3

9.9

8.3

5.0

3.4

4.5%

Comtech Telecommunications

204

0.9

0.8

9.9

7.6

(6.9)

17.4

-4.1%

Mean of RF specialists

0.9

0.9

8.9

7.8

9.5

13.1

CML Microsystems

56.6

2.2

2.0

8.5

7.5

34.2

28.0

18.7%

Kromek Group

45.1

3.6

2.6

(67.0)

128.0

(10.6)

(12.3)

31.9%

Mynaric

125.3

6.3

1.2

(2.7)

(13.0)

(5.4)

19.0

525.5%

Sivers Semiconductors

205.5

13.9

4.6

(30.9)

27.3

(19.4)

(100.0)

141.3%

Trackwise Designs

21.6

2.7

1.0

25.6

5.4

(35.9)

17.7

88.0%

Mean of companies with highly differentiated technology

5.8

2.3

17.1

13.4

34.2

21.6

Filtronic

20

1.1

1.0

6.7

8.7

14.1

22.5

10.5%

Source: Refinitiv, Edison Investment Research. Note: Priced at 16 June 2022. *FY0 to FY2. Grey shading indicates exclusion from mean.

Comparing Filtronic’s multiples with those of its RF specialist peers, we note it is trading broadly in line with the mean of the sample on prospective EV/sales and EV/EBITDA and at a premium to the mean on P/E multiples. 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 most of the companies in the first sample set, suggesting a premium to the multiples of this sample is justified.

Exhibit 3: Financial summary

31-May

£m

2020

2021

2022e

2023e

INCOME STATEMENT

Revenue

 

 

17.2

15.6

17.1

19.0

EBITDA

 

 

1.2

1.8

2.7

2.1

Operating profit (before amort. and excepts.)

 

0.4

0.6

1.7

1.1

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

Exceptionals

(0.6)

0.1

0.0

0.0

Reported operating profit

(0.2)

0.6

1.7

1.1

Net Interest

(0.2)

(0.4)

(0.2)

(0.2)

Exceptionals

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

0.1

0.1

1.5

0.9

Profit Before Tax (reported)

 

 

(0.4)

0.2

1.5

0.9

Reported tax

(0.1)

(0.2)

0.2

0.2

Profit After Tax (norm)

0.1

0.3

1.4

0.9

Profit After Tax (reported)

(0.5)

0.1

1.7

1.1

Discontinued operations

(1.4)

0.0

0.0

0.0

Net income (normalised)

0.1

0.3

1.4

0.9

Net income (reported)

(2.0)

0.1

1.7

1.1

Average Number of Shares Outstanding (m)

211

213

215

215

EPS - normalised (p)

 

 

0.05

0.14

0.67

0.42

EPS - diluted normalised (p)

 

 

0.05

0.14

0.66

0.42

EPS - basic reported (p)

 

 

(0.25)

0.03

0.80

0.51

Dividend (p)

0.00

0.00

0.00

0.00

Revenue growth (%)

7.8%

-9.5%

10.0%

11.1%

EBITDA Margin (%)

6.8

11.4

15.9

11.0

Normalised Operating Margin

2.2

3.7

9.9

5.6

BALANCE SHEET

Fixed Assets

 

 

7.5

6.2

5.9

5.6

Intangible Assets

1.8

1.7

1.9

2.0

Tangible Assets

3.8

3.3

3.1

2.8

Investments & other

1.9

1.2

0.9

0.7

Current Assets

 

 

9.8

8.4

9.9

10.8

Stocks

2.9

2.2

2.5

2.9

Debtors

4.8

3.3

3.3

3.5

Cash & cash equivalents

2.0

2.9

4.1

4.4

Other

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(6.0)

(3.6)

(3.3)

(3.0)

Creditors

(3.5)

(2.4)

(2.1)

(1.8)

Short term borrowings including lease liabilities

(0.7)

(0.6)

(0.6)

(0.6)

Other

(1.8)

(0.6)

(0.6)

(0.6)

Long Term Liabilities

 

 

(2.0)

(1.7)

(1.7)

(1.7)

Long term borrowings

(2.0)

(1.6)

(1.6)

(1.6)

Other long term liabilities

0.0

(0.1)

(0.1)

(0.1)

Net Assets

 

 

9.4

9.4

10.8

11.7

Minority interests

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

9.4

9.4

10.8

11.7

CASH FLOW

Op Cash Flow before WC and tax

1.2

1.8

2.7

2.1

Working capital

(2.4)

1.1

(0.6)

(0.8)

Exceptional & other

(2.7)

(1.0)

0.0

0.0

Tax

1.2

0.5

0.2

0.2

Operating Cash Flow

 

 

(2.6)

2.5

2.3

1.5

Capex (including capitalised R&D)

(1.2)

(0.4)

(1.0)

(1.0)

Acquisitions/disposals

3.7

0.0

0.0

0.0

Net interest

(0.3)

(0.2)

(0.2)

(0.2)

Equity financing

0.3

0.0

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

(0.2)

1.9

1.2

0.3

Opening net debt/(cash)

 

 

(2.5)

0.7

(0.8)

(1.9)

FX

0.0

0.0

0.0

0.0

Other non-cash movements

(3.0)

(0.4)

(0.0)

(0.0)

Closing net debt/(cash) including lease liabilities

 

0.7

(0.8)

(1.9)

(2.2)

Property lease liabilities

1.1

1.2

1.2

1.2

Closing net debt/(cash)

 

 

(0.4)

(1.9)

(3.1)

(3.4)

Source: Edison Investment Research


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 £60,000 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.

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Copyright: Copyright 2022 Edison Investment Research Limited (Edison).

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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

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 £60,000 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 2022 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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