Filtronic — Backlog supports strong growth from H224

Filtronic (AIM: FTC)

Last close As at 26/02/2024

GBP0.40

1.00 (2.56%)

Market capitalisation

GBP85m

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Research: TMT

Filtronic — Backlog supports strong growth from H224

Filtronic’s recent investment and focus on high-performance radio frequency (RF) design and manufacturing is starting to pay off, with recent new customer wins, development contracts and volume production orders boosting the order backlog. H124 results do not reflect this recent success: revenue was essentially flat and investment in sales and engineering reduced EBITDA. However, the strong backlog gives management confidence that revenue and profit will exceed consensus estimates for FY24 and FY25 and we have upgraded our EPS forecasts by 234% in FY24 and 96% in FY25.

Katherine Thompson

Written by

Katherine Thompson

Director

TMT

Filtronic

Backlog supports strong growth from H224

H124 results

Tech hardware and equipment

6 February 2024

Price

25.5p

Market cap

£55m

Net cash (£m) at end H124 (including £2.8m lease liabilities)

1.2

Shares in issue

215.3m

Free float

66.1%

Code

FTC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

21.4

56.4

137.2

Rel (local)

22.7

51.7

147.8

52-week high/low

25.6p

10.8p

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

FY24 trading update

June 2024

Analyst

Katherine Thompson

+44 (0)20 3077 5700

Filtronic is a research client of Edison Investment Research Limited

Filtronic’s recent investment and focus on high-performance radio frequency (RF) design and manufacturing is starting to pay off, with recent new customer wins, development contracts and volume production orders boosting the order backlog. H124 results do not reflect this recent success: revenue was essentially flat and investment in sales and engineering reduced EBITDA. However, the strong backlog gives management confidence that revenue and profit will exceed consensus estimates for FY24 and FY25 and we have upgraded our EPS forecasts by 234% in FY24 and 96% in FY25.

Year end

Revenue (£m)

EBITDA* (£m)

PBT*
(£m)

Diluted
EPS* (p)

DPS
(p)

P/E
(x)

05/22

17.1

2.8

1.5

0.53

0

47.8

05/23

16.3

1.3

0.1

0.06

0

393.7

05/24e

23.6

3.8

2.3

1.07

0

23.8

05/25e

24.2

3.9

2.4

1.09

0

23.4

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

H124 results mask recent success

Filtronic reported H124 revenue of £8.5m (+1% y-o-y), EBITDA of £0.2m and an operating loss of £0.4m, in line with management’s internal forecasts. Component shortages receded during H124 and are now no longer an issue. Cash at end H124 was £4.1m, with £1.4m cash generated during H124.

Growing backlog drives upgrades

Including a $9.9m/£7.8m production contract announced today, recent contract wins in the low Earth orbit (LEO) satellite market provide c £16m in orders, which are due to be shipped in H224 and FY25. Contracts with BAE Systems and QinetiQ have added further to the backlog, giving management confidence that trading will be materially above consensus in FY24 and FY25. We have upgraded our revenue estimates by 14% and 6% and our EBITDA estimates by 74% and 43%, respectively.

Valuation: Anticipated upgrades delivered

The stock is up 137% over the last year and 20% year-to-date, in our view reflecting growing confidence in management’s strategy after recent contract wins in LEO satellite and aerospace and defence markets. On our upgraded forecasts, P/E multiples now appear more reasonable. We have performed a reverse DCF analysis using our forecasts to FY25, a WACC of 10% and a long-term growth rate of 3%. The share price implies revenue growth of 10% per year for FY26–28 coupled with the EBITDA margin rising to 23% by FY28. Several development contracts have the scope to provide substantial production volumes if successfully converted and we believe could potentially support a higher growth rate and for a longer period.

H124 results review

We summarise Filtronic’s H124 performance in Exhibit 1.

Exhibit 1: Half-year financial summary

£m

H124

H123

y-o-y

Revenue

8.48

8.37

1.4%

Adjusted EBITDA

0.21

0.95

-78.4%

Adjusted EBITDA margin

2.4%

11.4%

-9.0pp

Adjusted operating profit

(0.37)

0.48

-85.2%

Adjusted operating margin

-4.4%

5.8%

-10.1pp

Operating profit

(0.37)

0.48

-85.2%

Operating margin

-4.4%

5.8%

-10.1pp

PBT

(0.52)

0.44

-95.7%

Net income

(0.52)

0.46

-98.6%

Reported basic EPS (p)

(0.24)

0.22

-46.3%

Normalised diluted EPS (p)

(0.24)

0.21

-45.0%

Net cash*

2.4

2.4

-0.3%

Source: Filtronic. *Includes all leases other than property leases.

H124 revenue increased 1% y-o-y to £8.48m, although it was 7% higher on a half-on-half basis. Cost of goods sold of £3.25m resulted in a gross contribution margin of 61.7%, down 2.4pp from H124 and down 0.4pp from H224, mainly due to sales mix (5G backhaul contracts are lower margin). Operating costs excluding depreciation and amortisation totalled £5.03m, up 11% y-o-y, resulting in adjusted EBITDA of £0.21m for H124, down 78% y-o-y. After depreciation and amortisation totalling £0.58m, the company reported an operating loss of £0.37m. These results do not reflect the recent contract wins in the aerospace and defence and LEO satellite markets, which we expect to contribute to H224 and beyond.

The company closed H124 with gross cash of £4.06m (H123: £3.06m), net cash after lease liabilities of £1.22m (H123 £0.96m) and net cash after leases but excluding property leases of £2.38m (H123 £2.38m).

The chart below shows the split of revenue by end market (estimated from chart in presentation).

Exhibit 2: Revenue by end market

£m

Share of group revenue

H124

H123

y-o-y

H124

H123

Xhaul

3.74

3.93

-5%

44%

47%

Space

0.48

0.07

586%

6%

1%

Aerospace & Defence

1.36

2.24

-39%

16%

27%

Critical communications

2.72

1.70

60%

32%

20%

Other

0.18

0.43

-58%

2%

5%

8.48

8.37

1%

Source: Filtronic

Space market demand accelerating

The contribution from the space market made up 6% of H124 revenue up from a negligible amount in the prior year. Since September 2023, Filtronic has won production contracts with a leading LEO satellite equipment provider worth $20m/£16m. These followed on from the original $2.8m/£2.2m development contract announced in January 2023 for customised Cerus solid state power amplifier modules for use in E-band trials for LEO satellite ground stations. With expected revenue recognition over CY24, this provides good support to H224 and H125 revenue.

Filtronic also announced that the same customer has awarded the company a £150k contract to develop a prototype E-band module that would form part of the satellite payload and provide downlink capability to E-band ground stations. We note that this customer has typically moved from prototype to production quickly and could do the same for this module. Subject to successful qualification testing and field trials, this would be Filtronic’s first completed product designed for space flight.

Filtronic is also working with the European Space Agency to develop a series of advanced mmWave products to enable broadband connectivity from LEO satellites to receiving ground stations.

In the LEO satellite market, the number of ground stations required is a fraction of the number of satellites in orbit. For example, Starlink uses roughly 400 ground stations but has more than 5,000 LEO satellites in orbit. Each ground station will have multiple antennas (8–40), with E-band currently making up c 5% of antennas although this is likely to rise as more multi-frequency satellites are deployed.

Notable contracts signed in aerospace and defence

While revenue from the aerospace and defence sector declined year-on-year, this was due to component shortages (now resolved). The company noted that it has seen increased engagement with defence primes in recent months. Growing levels of global conflict are highlighting the need for increased defence spending, with electronic warfare and battlefield communications key areas for technology investment.

The contract announced just before Christmas with a prime defence contractor was disclosed as being with BAE Systems. The contract, worth £4.5m, is for a shipborne radar system with a product qualification phase that started in January and production expected for 12 months from Q4 CY24. This should result in revenue recognition from H224 to FY26.

More recently, the company won QinetiQ as a customer, with a £2.0m development contract for a land and helicopter mounted range radar programme; revenue is to be recognised over two years, ie H224 to H226.

The company has also won several contracts from the Defence Science and Technology Laboratory programme to develop a next generation tuneable filter platform, with the most recent contract worth £0.4m.

We believe that Filtronic’s in-house manufacturing and specialised RF capabilities are a key factor in winning UK defence contracts, as the sovereign supply chain is crucial to those contractors.

Telecoms market mixed

The Xhaul market (telecoms backhaul) saw a small decline year-on-year. 5G rollouts were similar to previous periods but the company expects demand to soften, dependent on regional rollouts. The critical communications market is seeing increasing demand and Filtronic has also signed contracts with several private high frequency trading network providers. Delivery is no longer hampered by component shortages. Management highlights that telecom equipment companies tend to be technology leaders in the RF space, so work that Filtronic does to develop products for them is useful as that technology filters down to other sectors such as aerospace and defence.

In the chart below, we summarise the serviceable addressable markets for Filtronic’s areas of focus; the company estimates the revenue potential for each area over FY25–27. This highlights that penetration of the leading companies in each area could drive significant revenue growth.

Exhibit 3: Serviceable addressable market FY2527, £m

Source: Filtronic

Outlook and changes to forecasts

On the basis of the growing backlog in the aerospace and defence and space markets, management anticipates that FY24 and FY25 revenue and profit will be ahead of market expectations. We upgrade our FY24 revenue forecast by 14%, which implies a material step up in revenue in H224 to £15.1m from the £8.4m reported in H124. We raise our FY25 forecast by 6%, which implies only 2.5% revenue growth, although if the company continues to sign new customers and win volume orders at a similar pace to the last 12 months, this could prove to be conservative.

With the current cost base able to support much higher revenue than has been reported recently, the company believes it could achieve an EBITDA margin of 15–25% in the near term. We forecast an EBITDA margin of 16% in both FY24 and FY25, as we assume that the company will invest in more business development and engineering resources to ensure it can continue to take advantage of further opportunities.

Overall, we upgrade our EPS forecast by 234% in FY24 and 96% in FY25. We forecast that the company will grow its net cash position over this period, providing headroom for increased investment in the business as opportunities arise.

Exhibit 4: Changes to estimates

£m

FY24e old

FY24e new

Change

y-o-y

FY25e old

FY25e new

Change

y-o-y

Revenues

20.7

23.6

14.2%

45.0%

22.7

24.2

6.4%

2.5%

EBITDA

2.2

3.8

73.6%

201.1%

2.7

3.9

42.9%

1.6%

EBITDA margin

10.7%

16.2%

12.0%

16.1%

Normalised/reported operating profit

0.9

2.5

175.6%

973.9%

1.4

2.6

81.0%

2.3%

Normalised/reported operating margin

4.5%

10.8%

6.3%

10.8%

Normalised/reported PBT

0.7

2.3

234.2%

3,515.8%

1.2

2.4

96.5%

2.6%

Normalised net income

0.7

2.3

234.2%

1,550.6%

1.2

2.4

96.5%

2.6%

Reported net income

0.7

2.3

234.2%

398.7%

1.2

2.4

96.5%

2.6%

Normalised basic EPS (p)

0.32

1.08

234.2%

1,550.8%

0.56

1.10

96.5%

2.0%

Normalised diluted EPS (p)

0.32

1.07

234.2%

1,551.8%

0.56

1.09

96.5%

2.0%

Reported basic EPS

0.32

1.08

234.2%

398.8%

0.56

1.10

96.5%

2.0%

Dividend per share (p)

0.00

0.00

N/A

N/A

0.00

0.00

N/A

N/A

Net debt/(cash)

(1.8)

(3.1)

71.9%

94.0%

(2.4)

(4.2)

70.8%

32.3%

Source: Edison Investment Research

Exhibit 5: Financial summary

Year-end May

£m

2021

2022

2023

2024e

2025e

INCOME STATEMENT

Revenue

 

 

15.6

17.1

16.3

23.6

24.2

EBITDA

 

 

1.8

2.8

1.3

3.8

3.9

Operating profit (before amort. and excepts.)

 

0.6

1.6

0.2

2.5

2.6

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Exceptionals

0.1

0.4

0.0

0.0

0.0

Reported operating profit

0.6

2.0

0.2

2.5

2.6

Net Interest

(0.4)

(0.1)

(0.2)

(0.2)

(0.2)

Exceptionals

0.0

0.0

0.0

0.0

0.0

Profit Before Tax (norm)

 

 

0.1

1.5

0.1

2.3

2.4

Profit Before Tax (reported)

 

 

0.2

1.9

0.1

2.3

2.4

Reported tax

(0.2)

(0.4)

0.4

0.0

0.0

Profit After Tax (norm)

0.3

1.2

0.1

2.3

2.4

Profit After Tax (reported)

0.1

1.5

0.5

2.3

2.4

Discontinued operations

0.0

0.0

0.0

0.0

0.0

Net income (normalised)

0.3

1.2

0.1

2.3

2.4

Net income (reported)

0.1

1.5

0.5

2.3

2.4

Average Number of Shares Outstanding (m)

213

215

215

215

216

EPS - normalised (p)

 

 

0.14

0.54

0.07

1.08

1.10

EPS - normalised fully diluted (p)

 

 

0.14

0.53

0.06

1.07

1.09

EPS - basic reported (p)

 

 

0.03

0.68

0.22

1.08

1.10

Dividend (p)

0.00

0.00

0.00

0.00

0.00

BALANCE SHEET

Fixed Assets

 

 

6.2

5.4

7.4

8.0

8.3

Intangible Assets

1.7

1.5

1.8

2.0

2.2

Tangible Assets

3.3

3.0

4.3

4.8

4.8

Investments & other

1.2

0.9

1.3

1.3

1.3

Current Assets

 

 

8.4

11.1

10.7

13.2

14.4

Stocks

2.2

2.6

2.8

3.2

3.3

Debtors

3.3

4.5

5.3

5.8

6.0

Cash & cash equivalents

2.9

4.0

2.6

4.1

5.1

Other

0.0

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(3.6)

(4.0)

(4.8)

(5.6)

(4.8)

Creditors

(2.4)

(3.0)

(3.7)

(4.5)

(3.6)

Short term borrowings including lease liabilities

(0.6)

(0.5)

(0.6)

(0.6)

(0.6)

Other

(0.6)

(0.5)

(0.5)

(0.5)

(0.5)

Long Term Liabilities

 

 

(1.7)

(1.4)

(1.7)

(1.7)

(1.7)

Long term borrowings

(1.6)

(1.3)

(1.7)

(1.7)

(1.7)

Other long term liabilities

(0.1)

(0.1)

(0.0)

(0.0)

(0.0)

Net Assets

 

 

9.4

11.0

11.5

13.9

16.2

Minority interests

0.0

0.0

0.0

0.0

0.0

Shareholders' equity

 

 

9.4

11.0

11.5

13.9

16.2

CASH FLOW

Op Cash Flow before WC and tax

1.8

2.8

1.3

3.8

3.9

Working capital

1.1

(0.8)

(0.4)

(0.1)

(1.1)

Exceptional & other

(1.0)

0.3

0.0

0.0

0.0

Tax

0.5

0.0

0.0

0.0

0.0

Operating Cash Flow

 

 

2.5

2.3

0.9

3.7

2.8

Capex (including capitalised R&D)

(0.4)

(0.3)

(1.5)

(1.3)

(0.9)

Acquisitions/disposals

0.0

0.0

0.0

0.0

0.0

Net interest

(0.2)

(0.2)

(0.2)

(0.2)

(0.2)

Equity financing

0.0

0.0

0.0

0.0

0.0

Dividends

0.0

0.0

0.0

0.0

0.0

Other

0.0

0.0

0.0

0.0

0.0

Net Cash Flow

1.9

1.9

(0.8)

2.1

1.6

Opening net debt/(cash)

 

 

0.7

(0.8)

(2.2)

(0.3)

(1.8)

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

(0.4)

(0.4)

(1.1)

(0.6)

(0.6)

Closing net debt/(cash) including lease liabilities

 

(0.8)

(2.2)

(0.3)

(1.8)

(2.9)

Property lease liabilities

1.2

1.0

1.3

1.3

1.3

Closing net debt/(cash)

 

 

(2.0)

(3.2)

(1.6)

(3.1)

(4.2)

Source: Filtronic, 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 £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.

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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.

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20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Ultimovacs — FDA Fast Track boosts confidence in UV1

Ultimovacs has received FDA Fast Track designation for its lead cancer vaccine, UV1, as a potential treatment for mesothelioma and builds on the Orphan Drug designation (ODD) already received in this indication. The designation offers a potentially accelerated route to market (if the clinical data continue to be supportive) as Ultimovacs progresses its universal vaccine in combination with checkpoint inhibitors across five indications. This regulatory decision was based on the positive results of the Phase II NIPU trial (reported October 2023), which showed a 27% reduction in risk of death with UV1 treatment compared to control. While management carefully evaluates an optimal path forward (Phase III programme) in mesothelioma, the most significant near-term catalyst remains the Phase II INITIUM results in malignant melanoma (expected March 2024). The company is scheduled to release FY23 earnings on 14 February and will likely provide an update then.

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