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Last close As at 30/03/2023
GBP0.12
▲ −0.13 (−1.07%)
Market capitalisation
GBP26m
Research: TMT
As flagged in Filtronic’s January trading update, demand for 5G mobile communications infrastructure and work for new customers drove 5% year-on-year revenue growth during H123. However, shortages of specific semiconductor components will result in some deliveries being delayed from FY23 to FY24. Since demand for the company’s products has not been affected, management expects an uplift in revenue and a return to the planned growth trajectory in FY24 as the temporary component shortages ease. We introduce FY24 estimates to reflect the anticipated recovery.
Filtronic |
Component shortages causing delivery delays |
H123 results |
Tech hardware and equipment |
7 February 2023 |
Share price performance
Business description
Next event
Analysts
Filtronic is a research client of Edison Investment Research Limited |
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As flagged in Filtronic’s January trading update, demand for 5G mobile communications infrastructure and work for new customers drove 5% year-on-year revenue growth during H123. However, shortages of specific semiconductor components will result in some deliveries being delayed from FY23 to FY24. Since demand for the company’s products has not been affected, management expects an uplift in revenue and a return to the planned growth trajectory in FY24 as the temporary component shortages ease. We introduce FY24 estimates to reflect the anticipated recovery.
Year end |
Revenue |
EBITDA* |
PBT* |
EPS* |
DPS |
P/E |
05/21 |
15.6 |
1.8 |
0.1 |
0.14 |
0.00 |
75.7 |
05/22 |
17.1 |
2.8 |
1.5 |
0.54 |
0.00 |
19.6 |
05/23e |
16.6 |
1.3 |
0.1 |
0.14 |
0.00 |
75.7 |
05/24e |
20.7 |
2.1 |
0.9 |
0.41 |
0.00 |
25.9 |
Note: *EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Good start to year but weaker second half expected
H123 revenue grew by 5% y-o-y to £8.4m, driven primarily by demand for products used in 5G mobile telecommunications infrastructure and the defence contract announced in July 2022 (see below). Adjusted EBITDA reduced slightly, from £1.1m to £1.0m, as management continued with its stated strategy of investing in sales and engineering to support diversification.
Return to planned growth trajectory in FY24
We have already changed our estimates to reflect some deliveries for mobile telecommunications infrastructure and defence applications being delayed from FY23 into FY24 and make no further changes at this point. The H223 weakness relates to short-term component supply issues, not demand, and the recent satcom contract win shows Filtronic winning significant business in this new and rapidly growing market, supporting the feasibility of a return to management’s planned growth trajectory in FY24. We therefore introduce FY24 estimates with revenues at the lower end of the range we implied in August 2022 (£20.7–21.5m). We expect this strong revenue growth to deliver a substantial improvement in EBITDA (up £0.8m to £2.1m), despite continued investment in sales and engineering costs and inflationary pressures.
Valuation: Uplift for successful diversification
The recent satcom contract win illustrates that management’s diversification strategy is going well. Our DCF analysis shows that if this strategy delivers double-digit year-on-year revenue growth from FY24 to FY27, while holding year-on-year growth in indirect costs at 5.0% or less from FY25 onwards, further uplift in Filtronic’s share price can be justified.
H123 performance
Diversification strategy generating growth
Group revenues grew by £0.2m y-o-y to £8.4m in H123. This was driven primarily by demand for products used in 5G mobile telecommunications infrastructure. Demand was boosted by network providers building inventory to support the construction of networks in India following the regulatory authority there finally approving the release of E-band and V-band licences in August 2022. In addition, aerospace and defence revenues benefitted from the £0.5m contract win announced in July 2022 with the Defence Science and Technology Lab (DSTL, an executive agency of the UK’s Ministry of Defence) for the design, manufacture and delivery of a modular, programmable reference system for testing radio frequency equipment. This is the second contract award Filtronic has received from DSTL, the first being a battlefield communications contract worth over £1m announced in January 2021. Revenues attributable to the public safety communications market were stable, with strong sales of tower-top amplifiers offset by lower sales of other products because a key customer had experienced component shortages, which prevented it from completing systems incorporating Filtronic modules. Management expects demand for these critical communications products to recover in FY24 as component shortages ease.
Investment for continued growth adversely affecting margins
Adjusted EBITDA reduced by £0.2m to £1.0m. Margins were adversely affected by an unfavourable product mix with a higher proportion of mobile telecommunications transceivers. In addition, indirect costs were higher because of investment in sales channels and engineering in support of the company’s diversification strategy. Pre-exceptional profit before tax reduced slightly, by £0.1m to £0.4m.
Strong balance sheet
Net cash including property leases fell by £1.2m during H123 to £1.0m at the period end. A key element of this movement was a £0.8m reduction in payables reflecting the settlement of payments relating to a build-up of inventory earlier in the period, which had unwound by the period end. The company invested £0.2m in capital equipment (£0.1m in H122), primarily a fully automated wedge bonder, which enables Filtronic to work on specialist defence projects for new and existing customers requiring higher volumes of parts. The company also invested £0.2m in capitalised R&D as the engineering team started work on a new E-band chipset, which will help with the diversification into the space sector, and its first W-band chipset. There was no capitalised R&D in FY22, when development work was related to customer-funded projects.
Outlook: Introduction of FY24 forecasts
We have already changed our estimates to reflect the shortages of specific semiconductor components reported in the January trading update and we make no further changes to our FY23 forecasts at this point.
We note that while management expects the near-term component availability issue to adversely affect the H223 performance, demand for the company’s products has not changed. Management consequently expects an uplift in revenue and a return to the planned growth trajectory in FY24 as the temporary component shortages ease. Our FY24 estimates therefore make the following assumptions:
Revenues
Our August 2022 note assumed an FY24 revenue range of £20.7–21.5m (ie modelling 9–13% growth on the previously expected FY23 revenues of £19.0m). The company’s three established markets of mobile telecommunications infrastructure, aerospace and defence and public safety communications networks are relatively unaffected by reductions in consumer spending. Consequently, since the January profits downgrade related to the company’s ability to ship product, not demand, we assume that revenues will pick up strongly in FY24 once the specific component shortages ease. In addition, the contract worth more than £2.0m announced in January 2023 shows that Filtronic is diversifying successfully into the rapidly growing space communications market. Management expects this will become a key market. We therefore model FY24 revenues at £20.7m, which are at the lower end of our previous range.
Margins and indirect costs
We model costs of sales/revenues at 40.3% vs 36.5% in FY23, reflecting a higher percentage of lower margin 5G XHaul revenues. Management expects to continue to add to the sales and engineering cost base during FY24 to support growth through diversification, although this programme should be complete by the year end, after which the cost base should be sufficient to serve the new markets. We therefore model an 11% y-o-y increase in indirect costs to cover the cost of additional personnel together with the impact of inflation on wages and energy costs.
Investment costs
We model a £0.3m rise in working capital and keep investment in capitalised R&D at FY23 levels (£0.5m). We model £0.5m expenditure on capital equipment, primarily for a system for the plastic encapsulation of monolithic microwave integrated circuits, which will support work on defence contracts.
Valuation
Exhibit 1: DCF analysis
FY25e EBITDA (£m) |
||||||
Year-on-year sales growth FY25–27e |
||||||
9.0% |
10.0% |
11.0% |
12.0% |
13.0% |
||
Indirect cost growth |
3.0% |
3.8 |
3.9 |
4.1 |
4.2 |
4.3 |
3.5% |
3.7 |
3.9 |
4.0 |
4.1 |
4.3 |
|
4.0% |
3.7 |
3.8 |
4.0 |
4.1 |
4.2 |
|
4.5% |
3.6 |
3.8 |
3.9 |
4.0 |
4.2 |
|
5.0% |
3.6 |
3.7 |
3.8 |
4.0 |
4.1 |
|
Indicative value (p/share) |
||||||
Year-on-year sales growth FY25–27e |
||||||
9.0% |
10.0% |
11.0% |
12.0% |
13.0% |
||
Indirect cost growth |
3.0% |
13.1 |
14.0 |
14.8 |
15.6 |
16.5 |
3.5% |
12.8 |
13.6 |
14.4 |
15.3 |
16.1 |
|
4.0% |
12.4 |
13.2 |
14.1 |
14.9 |
15.8 |
|
4.5% |
12.0 |
12.9 |
13.7 |
14.5 |
15.4 |
|
5.0% |
11.7 |
12.5 |
13.3 |
14.2 |
15.0 |
|
Source: Edison Investment Research
As discussed in our July note, given the volatility in EBITDA margin and lack of direct peers, we prefer a discounted cash flow (DCF) approach for valuing Filtronic. This models the impact on EBITDA and indicative valuation if diversification into new markets such as satellite communications enables Filtronic to deliver sustained double-digit revenue growth between FY24 and FY27, in line with management’s objectives, while at the same time the indirect cost base stays close to FY24 levels. As discussed above, management invested in additional staff to support diversification during FY22 and expects to continue to do so in FY23 and FY24, but it does not expect to add materially to the cost base after that.
We model revenue growth between FY25 and FY27 of 9.0% to 13.0% and growth in indirect costs at 3.0% to 5.0%. Costs of sales/revenues is modelled at 36.5%, which is the same as FY23, to reflect a higher proportion of satcom sales and consequently a lower proportion of mobile communications infrastructure revenues. Investment in intangible assets is maintained at FY23 and FY24 levels, but we assume investment in tangible assets is reduced to £0.2.m each year, which is similar to FY22 levels. The calculation uses a WACC of 12.0%, in line with the valuation of intangible assets and goodwill in the company’s FY22 report and accounts, and a terminal growth rate of 3.0%.
The analysis shows that if management’s diversification strategy delivers double-digit year-on-year growth between FY24 and FY27, while year-on-year growth in indirect costs is held at 5.0% or less, further uplift in the share price should be justified. For example, Exhibit 1 shows that if Filtronic can deliver 12% revenue growth each year between FY25 and FY27, coupled with year-on-year cost growth of just 4% over the same period, our DCF would produce an indicative value per share of 14.9p, 38% higher than the current level.
Exhibit 2: Financial summary
Year end May |
£m |
2021 |
2022 |
2023e |
2024e |
|
INCOME STATEMENT |
||||||
Revenue |
|
|
15.6 |
17.1 |
16.6 |
20.7 |
EBITDA |
|
|
1.8 |
2.8 |
1.3 |
2.1 |
Operating profit (before amort. and excepts.) |
|
0.6 |
1.6 |
0.3 |
1.1 |
|
Amortisation of acquired intangibles |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
0.1 |
0.4 |
0.0 |
0.0 |
||
Reported operating profit |
0.6 |
2.0 |
0.3 |
1.1 |
||
Net Interest |
(0.4) |
(0.1) |
(0.2) |
(0.2) |
||
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
0.1 |
1.5 |
0.1 |
0.9 |
Profit Before Tax (reported) |
|
|
0.2 |
1.9 |
0.1 |
0.9 |
Reported tax |
(0.2) |
(0.4) |
0.1 |
0.1 |
||
Profit After Tax (norm) |
0.3 |
1.2 |
0.3 |
0.9 |
||
Profit After Tax (reported) |
0.1 |
1.5 |
0.3 |
1.1 |
||
Discontinued operations |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net income (normalised) |
0.3 |
1.2 |
0.3 |
0.9 |
||
Net income (reported) |
0.1 |
1.5 |
0.3 |
1.1 |
||
Average Number of Shares Outstanding (m) |
213 |
215 |
215 |
215 |
||
EPS - normalised (p) |
|
|
0.14 |
0.54 |
0.14 |
0.41 |
EPS - normalised fully diluted (p) |
|
|
0.14 |
0.53 |
0.13 |
0.41 |
EPS - basic reported (p) |
|
|
0.03 |
0.68 |
0.14 |
0.51 |
Dividend (p) |
0.00 |
0.00 |
0.00 |
0.00 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
6.2 |
5.4 |
5.3 |
5.0 |
Intangible Assets |
1.7 |
1.5 |
1.7 |
1.9 |
||
Tangible Assets |
3.3 |
3.0 |
2.7 |
2.5 |
||
Investments & other |
1.2 |
0.9 |
0.8 |
0.6 |
||
Current Assets |
|
|
8.4 |
11.1 |
9.8 |
11.3 |
Stocks |
2.2 |
2.6 |
3.3 |
3.6 |
||
Debtors |
3.3 |
4.5 |
3.5 |
3.8 |
||
Cash & cash equivalents |
2.9 |
4.0 |
3.0 |
3.8 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Liabilities |
|
|
(3.6) |
(4.0) |
(2.4) |
(2.7) |
Creditors |
(2.4) |
(3.0) |
(1.4) |
(1.7) |
||
Short term borrowings including lease liabilities |
(0.6) |
(0.5) |
(0.5) |
(0.5) |
||
Other |
(0.6) |
(0.5) |
(0.5) |
(0.5) |
||
Long Term Liabilities |
|
|
(1.7) |
(1.4) |
(1.4) |
(1.4) |
Long term borrowings |
(1.6) |
(1.3) |
(1.3) |
(1.3) |
||
Other long term liabilities |
(0.1) |
(0.1) |
(0.1) |
(0.1) |
||
Net Assets |
|
|
9.4 |
11.0 |
11.3 |
12.2 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
9.4 |
11.0 |
11.3 |
12.2 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
1.8 |
2.8 |
1.3 |
2.1 |
||
Working capital |
1.1 |
(0.8) |
(1.3) |
(0.3) |
||
Exceptional & other |
(1.0) |
0.3 |
0.0 |
0.0 |
||
Tax |
0.5 |
0.0 |
0.1 |
0.1 |
||
Operating Cash Flow |
|
|
2.5 |
2.3 |
0.2 |
1.9 |
Capex (including capitalised R&D) |
(0.4) |
(0.3) |
(1.0) |
(1.0) |
||
Acquisitions/disposals |
0.0 |
0.0 |
0.0 |
0.0 |
||
Net interest |
(0.2) |
(0.2) |
(0.2) |
(0.2) |
||
Equity financing |
0.0 |
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 |
1.9 |
1.9 |
(1.0) |
0.8 |
||
Opening net debt/(cash) |
|
|
0.7 |
(0.8) |
(2.2) |
(1.2) |
FX |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other non-cash movements |
(0.4) |
(0.5) |
(0.0) |
(0.0) |
||
Closing net debt/(cash) including lease liabilities |
|
(0.8) |
(2.2) |
(1.2) |
(2.0) |
|
Property lease liabilities |
1.2 |
1.0 |
1.8 |
1.8 |
||
Closing net debt/(cash) |
|
|
(1.9) |
(3.1) |
(3.0) |
(3.8) |
Source: Company reports, Edison Investment Research
|
|
Research: TMT
Ebiquity’s year-end trading update confirms that revenue continued to grow strongly in H222, delivering a 20% improvement for the full year, with underlying organic growth of 9%. Management is guiding to an underlying operating margin of 12%, implying that FY22 operating profit will be just ahead of our £8.9m forecast, notwithstanding the slight undershoot on revenue. This improvement in margin reflects the two transformative acquisitions made in the year, adding operational capability and efficiency, and scaling the US reach, as well as the increase of digital in the revenue mix. The shares are priced at a substantial discount to both peers and the group’s long-term average EV/EBITDA multiple.
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