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Research: TMT
Filtronic has announced a contract win worth more than £2.0m with a new customer in the satellite communications equipment market, demonstrating its ability to diversify outside its three core sectors. However, specific semiconductor component shortages mean that some deliveries for mobile telecommunications infrastructure and defence applications will be delayed from FY23 (year ending May 2023) into FY24. We have cut our FY23 revenue and EBITDA estimates by 13% and 37% respectively to reflect these delays.
Filtronic |
Expansion of presence in satcom market |
New contract award and trading update |
Tech hardware and equipment |
1 February 2023 |
Share price performance
Business description
Next event
Analysts
Filtronic is a research client of Edison Investment Research Limited |
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Filtronic has announced a contract win worth more than £2.0m with a new customer in the satellite communications equipment market, demonstrating its ability to diversify outside its three core sectors. However, specific semiconductor component shortages mean that some deliveries for mobile telecommunications infrastructure and defence applications will be delayed from FY23 (year ending May 2023) into FY24. We have cut our FY23 revenue and EBITDA estimates by 13% and 37% respectively to reflect these delays.
Year end |
Revenue (£m) |
EBITDA* |
PBT* |
EPS* |
DPS |
P/E |
05/20 |
17.2 |
1.2 |
0.1 |
0.05 |
0.00 |
225.0 |
05/21 |
15.6 |
1.8 |
0.1 |
0.14 |
0.00 |
80.4 |
05/22 |
17.1 |
2.8 |
1.5 |
0.54 |
0.00 |
20.8 |
05/23e |
16.6 |
1.3 |
0.1 |
0.14 |
0.00 |
80.4 |
Note: *EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
New satcom contract win
As discussed in our July note, mmWave transmission is a good option for links between a satellite, unmanned aerial vehicle or aircraft and the ground because of the capacity available at higher frequencies. Filtronic has already proved its E-band solid-state power amplifier modules through work with a high-altitude pseudo-satellite developer. Under the new contract, Filtronic’s modules will be installed in selected ground stations for commercial trials of E-band links to and from low Earth orbit satellites. The contract is worth more than £2.0m, with revenues to be recognised during calendar 2023.
Growth in H123 but weaker second half
H123 revenue grew by 5% to £8.4m, generating £1.0m adjusted EBITDA (£1.1m H122). After this strong start to the year, shortages of specific semiconductor components will result in some deliveries for mobile telecommunications infrastructure and defence applications being delayed from FY23 into FY24. We summarise the changes to our estimates overleaf. We note that while management expects the near-term component availability issue to adversely affect H223 performance, demand for the company’s products has not been affected. Management consequently expects an uplift in revenue and a return to the planned growth trajectory in FY24 as the temporary component shortages ease.
Valuation: Uplift for successful diversification
The new 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 FY24 onwards, further uplift in Filtronic’s share price can be justified.
Changes to estimates
Our estimate revisions are summarised in Exhibit 1.
Exhibit 1: Revisions to estimates
£m unless stated |
FY22 |
FY23 |
|||
Actual |
Old |
New |
Change |
||
Revenues |
17.1 |
19.0 |
16.6 |
-12.5% |
|
EBITDA |
2.8 |
2.1 |
1.3 |
-36.8% |
|
EBITDA margin |
16.5% |
11.0% |
8.0% |
-27.8% |
|
Normalised PBT |
1.5 |
0.9 |
0.1 |
-84.3% |
|
Normalised basic EPS (p) |
0.54 |
0.42 |
0.14 |
-68.0% |
|
Dividend per share (p) |
0.00 |
0.00 |
0.00 |
N/A |
|
Net debt/(cash) |
(3.1) |
(3.8) |
(2.2) |
-42.7% |
|
Source: Edison Investment Research
Valuation
Exhibit 2: DCF analysis
FY24e EBITDA (£m) |
||||||
Indirect cost growth |
3.0% |
1.9 |
||||
3.5% |
1.8 |
|||||
4.0% |
1.8 |
|||||
4.5% |
1.7 |
|||||
5.0% |
1.7 |
|||||
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% |
13.4 |
14.3 |
15.3 |
16.3 |
17.3 |
3.5% |
12.7 |
13.7 |
14.7 |
15.7 |
16.7 |
|
4.0% |
12.1 |
13.1 |
14.1 |
15.1 |
16.1 |
|
4.5% |
11.5 |
12.4 |
13.4 |
14.4 |
15.4 |
|
5.0% |
10.8 |
11.8 |
12.8 |
13.8 |
14.8 |
|
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 FY23 levels. Management invested in additional staff during FY22 and FY23 to support the intended growth, and expect only modest increases in indirect costs after that.
Our previous calculation assumed an FY24 revenue range of £20.7m to £21.5m, ie modelling 9% to 13% growth on FY23 revenues of £19.0m. The company’s three core markets: mobile telecommunications infrastructure, defence, and public safety communications networks are relatively unaffected by reductions in consumer spending. Since the profits downgrade relates 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 and therefore model FY24 revenues at £20.0m. We then model revenue growth between FY25 and FY27 of 9.0% to 13.0%. We model growth in indirect costs at 3.0% to 5.0% from FY24 to FY27. Costs of sales and revenues is modelled at 43.1%, reflecting a higher percentage of 5G XHaul revenues than FY21 or FY22. Investment in intangible assets is maintained at FY23 levels, but investment in tangible assets is reduced to £0.2.m each year, which is similar to FY22 levels. The calculation uses a WACC of 10.0% and a terminal growth rate of 3.0%
The analysis shows that if management’s diversification strategy delivers double-digit year-on-year growth from FY24 through to 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 2 shows that if Filtronic can deliver 12% revenue growth each year between FY25 and FY27, coupled with only 4% year-on-year cost growth over the same period, our DCF would produce an indicative value per share of 15.1p, 34% higher than the current level.
Exhibit 3: Financial summary
Year end 31 May |
£m |
2020 |
2021 |
2022 |
2023e |
|
INCOME STATEMENT |
||||||
Revenue |
|
|
17.2 |
15.6 |
17.1 |
16.6 |
EBITDA |
|
|
1.2 |
1.8 |
2.8 |
1.3 |
Operating profit (before amort. and excepts.) |
|
0.4 |
0.6 |
1.6 |
0.3 |
|
Amortisation of acquired intangibles |
0.0 |
0.0 |
0.0 |
0.0 |
||
Exceptionals |
(0.6) |
0.1 |
0.4 |
0.0 |
||
Reported operating profit |
(0.2) |
0.6 |
2.0 |
0.3 |
||
Net Interest |
(0.2) |
(0.4) |
(0.1) |
(0.2) |
||
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
|
|
0.1 |
0.1 |
1.5 |
0.1 |
Profit Before Tax (reported) |
|
|
(0.4) |
0.2 |
1.9 |
0.1 |
Reported tax |
(0.1) |
(0.2) |
(0.4) |
0.1 |
||
Profit After Tax (norm) |
0.1 |
0.3 |
1.2 |
0.3 |
||
Profit After Tax (reported) |
(0.5) |
0.1 |
1.5 |
0.3 |
||
Discontinued operations |
(1.4) |
0.0 |
0.0 |
0.0 |
||
Net income (normalised) |
0.1 |
0.3 |
1.2 |
0.3 |
||
Net income (reported) |
(2.0) |
0.1 |
1.5 |
0.3 |
||
Average Number of Shares Outstanding (m) |
211 |
213 |
215 |
215 |
||
EPS - normalised (p) |
|
|
0.05 |
0.14 |
0.54 |
0.14 |
EPS - normalised fully diluted (p) |
|
|
0.05 |
0.14 |
0.53 |
0.13 |
EPS - basic reported (p) |
|
|
(0.25) |
0.03 |
0.68 |
0.14 |
Dividend (p) |
0.00 |
0.00 |
0.00 |
0.00 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
7.5 |
6.2 |
5.4 |
5.3 |
Intangible Assets |
1.8 |
1.7 |
1.5 |
1.7 |
||
Tangible Assets |
3.8 |
3.3 |
3.0 |
2.7 |
||
Investments & other |
1.9 |
1.2 |
0.9 |
0.8 |
||
Current Assets |
|
|
9.8 |
8.4 |
11.1 |
9.8 |
Stocks |
2.9 |
2.2 |
2.6 |
3.3 |
||
Debtors |
4.8 |
3.3 |
4.5 |
3.5 |
||
Cash & cash equivalents |
2.0 |
2.9 |
4.0 |
3.0 |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
||
Current Liabilities |
|
|
(6.0) |
(3.6) |
(4.0) |
(2.4) |
Creditors |
(3.5) |
(2.4) |
(3.0) |
(1.4) |
||
Short term borrowings including lease liabilities |
(0.7) |
(0.6) |
(0.5) |
(0.5) |
||
Other |
(1.8) |
(0.6) |
(0.5) |
(0.5) |
||
Long Term Liabilities |
|
|
(2.0) |
(1.7) |
(1.4) |
(1.4) |
Long term borrowings |
(2.0) |
(1.6) |
(1.3) |
(1.3) |
||
Other long term liabilities |
0.0 |
(0.1) |
(0.1) |
(0.1) |
||
Net Assets |
|
|
9.4 |
9.4 |
11.0 |
11.3 |
Minority interests |
0.0 |
0.0 |
0.0 |
0.0 |
||
Shareholders' equity |
|
|
9.4 |
9.4 |
11.0 |
11.3 |
CASH FLOW |
||||||
Op Cash Flow before WC and tax |
1.2 |
1.8 |
2.8 |
1.3 |
||
Working capital |
(1.7) |
1.1 |
(0.8) |
(1.3) |
||
Exceptional & other |
(3.3) |
(1.0) |
0.3 |
0.0 |
||
Tax |
1.2 |
0.5 |
0.0 |
0.1 |
||
Operating Cash Flow |
|
|
(2.6) |
2.5 |
2.3 |
0.2 |
Capex (including capitalised R&D) |
(1.2) |
(0.4) |
(0.3) |
(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 |
1.9 |
(1.0) |
||
Opening net debt/(cash) |
|
|
(2.0) |
0.7 |
(0.8) |
(2.2) |
FX |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other non-cash movements |
(3.0) |
(0.4) |
(0.5) |
(0.0) |
||
Closing net debt/(cash) including lease liabilities |
|
0.7 |
(0.8) |
(2.2) |
(1.2) |
|
Property lease liabilities |
1.1 |
1.2 |
1.0 |
1.0 |
||
Closing net debt/(cash) |
|
|
(0.4) |
(1.9) |
(3.1) |
(2.2) |
Source: Edison Investment Research
|
|
Research: Healthcare
Incannex Healthcare’s Q223 cash flow report provided the period’s key operational highlights. Notable activities include the start of a bioavailability and bioequivalence (BA/BE) study for its lead clinical asset, IHL-42X, ahead of the anticipated investigational new drug (IND) submission in Q1 CY23, a positive pre-IND meeting with the FDA on IHL-216A (for concussion and traumatic brain injury, TBI) and the completion of patient dosing in the Phase I trial of IHL-675A (for rheumatoid arthritis, inflammatory bowel disease and lung inflammation). In addition to progressing its internal pipeline, Incannex has focused on expanding IHL-42X’s patent portfolio, a critical part of its developmental strategy, in our view. With a cash balance of A$41.4m (US$29.4m) at end-Q223, supported by a A$13m private placement, management has guided that at the current quarterly burn rate (A$4.3m), the company is funded into Q1 CY25.
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