Filtronic — Expansion of presence in satcom market

Filtronic (AIM: FTC)

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Research: TMT

Filtronic — Expansion of presence in satcom market

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.

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Filtronic_resized

TMT

Filtronic

Expansion of presence in satcom market

New contract award and trading update

Tech hardware and equipment

1 February 2023

Price

11.25p

Market cap

£24m

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

3.1

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

(12.6)

1.0

12.8

Rel (local)

(16.5)

(8.7)

10.6

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

H123 results

7 February 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

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*
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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

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.

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Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

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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.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

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London +44 (0)20 3077 5700

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United Kingdom

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1185 Avenue of the Americas

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United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

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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 2023 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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