Filtronic — Component shortages causing delivery delays

Filtronic (AIM: FTC)

Last close As at 19/04/2024

GBP0.33

−1.80 (−5.14%)

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GBP73m

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Research: TMT

Filtronic — Component shortages causing delivery delays

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.

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Written by

TMT

Filtronic

Component shortages causing delivery delays

H123 results

Tech hardware and equipment

7 February 2023

Price

10.8p

Market cap

£23m

Net cash (£m) at end November 2022 (including £2.1m lease liabilities)

1.0

Shares in issue

215.1m

Free float

66.1%

Code

FTC

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(17.3)

(10.4)

(8.5)

Rel (local)

(19.1)

(16.7)

(10.5)

52-week high/low

17p

9p

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

FY23 results

August 2023

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Dan Ridsdale

+44 (0)20 3077 5700

Filtronic is a research client of Edison Investment Research Limited

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
(£m)

EBITDA*
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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


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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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.

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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.

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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.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

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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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Research: TMT

Ebiquity — Strong revenue growth and improving margin

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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