Operational leverage in H125

In H125, Filtronic reported revenue of £25.6m (+202% y-o-y, +51% h-o-h), adjusted EBITDA of £8.7m (vs £0.2m in H124) and reported basic EPS of 3.08p (vs -0.24p in H124). The space sector was the key driver of growth, with activity in the aerospace and defence market showing more modest growth as the company awaits orders for aircraft radar. The higher level of revenue generated an EBITDA margin of 34%, up from 2% in H124 and 28% in H224, despite investment in headcount and facilities.

Upgrading revenue and EBITDA forecasts

On 10 February, Filtronic announced it had received an order worth $20.9m (£16.8m) from SpaceX for delivery in FY25 and FY26; we assume the bulk will be shipped in FY26. We upgrade FY25 revenue by 4.2% and FY26 by 4.7% with EBITDA upgrades of 3.1% and 4.1% respectively. The close working relationship with SpaceX provides the company with good visibility into FY26 and the conversion of recent design wins in the aerospace and defence market into orders could provide further support to our FY26 forecasts. We forecast an increase in net cash at the end of FY25 to £10.3m rising to £14.0m by the end of FY26.

Valuation: Factoring in long-term growth

Performing a reverse DCF with a WACC of 8.3%, the current share price implies revenue growth of 13.8% per year for FY27–34 with an average EBITDA margin of 25.4% over that period. In our view, the relationship with SpaceX, the potential to widen the customer base in the space market and growing penetration of the aerospace and defence market all provide avenues for sustainable growth.

Review of H125 results

Exhibit 1 summarises Filtronic’s H125 results.

As highlighted in two recent upgrades to our forecasts, the company has seen strong demand from its largest customer, SpaceX, resulting in revenue growth of 202% y-o-y. This has been achieved by expanding production facilities to cope with the additional demand, with two additional production lines added in September.

At the end of FY24 a contract asset of £2.6m was created, representing the value of the warrants issued to SpaceX when the strategic partnership was announced in April 2024. The contract asset was amortised by £0.9m in H125 (treated as an offset to revenue) and we forecast the remainder to be amortised in H225 and FY26. SpaceX has already placed sufficient orders for the 10.86m warrants in tranche 1 to fully vest and this is already factored into our diluted EPS forecasts.

Adjusted EBITDA increased from £0.2m to £8.7m with the margin increasing from 2.4% to 34.0%. Adjusted EBITDA adds back the contract asset amortisation as well as share-based payments of £186k. Costs before depreciation and amortisation (material costs plus overheads) totalled £18.0m, up from £8.3m in H124. Overheads increased significantly, from £5.0m in H124 to £8.2m in H125, reflecting the investments the company has made to scale the business (see below).

After minimal net finance costs and tax, the company reported net income of £6.7m (£7.8m on a normalised basis).

Cash at the end of H125 was £7.2m; cash net of leases was £4.3m and cash net of property leases was £5.1m compared to £5.2m at the end of FY24 and £2.4m at the end of H124. Management noted that accounts receivable was elevated at the period end, with one customer paying a material invoice several days later.

Performance by end market

As expected, the Xhaul/space market made up the largest proportion of revenue, reflecting the volume of orders delivered to SpaceX. Combined, revenue from the Xhaul/space markets increased 426% y-o-y and we estimate it made up c 87% of revenue. Revenue from aerospace and defence customers grew 7% y-o-y (we estimate to c 6% of revenue) and revenue from critical communications customers declined 39% y-o-y (to c 6% of revenue), after an exceptional year last year.

Previously signed contracts with QinetiQ, BAE Maritime Systems and the European Space Agency still have material revenue to be recognised. The QinetiQ project is expected to be substantively complete by the end of FY25 and the BAE project is due to complete in FY26. Aerospace and defence customers have been slower to place new orders than expected, mainly due to uncertainty around the government’s strategic defence review that is due this spring.

Business update

As previously outlined, management is focused on diversifying the customer base and positioning the company to exploit high growth opportunities. The strategic agreement with SpaceX is a key example of this approach, driving a tripling in revenue from H124 to H125. To support this level of growth, management is undertaking various measures to support the scaling on the business.

Strengthening the management team

Filtronic has expanded its leadership team; new hires include director of product engineering, chief commercial officer, director of programmes and general counsel.

Upgrading and expanding facilities

In September 2024, Filtronic added two extra lines to its production facility. Each extra line costs c £750k and can support incremental revenue of £10–15m. The company will be moving its headquarters to a new state-of-the-art head office and manufacturing site in Sedgefield, very close to the existing site. This will double Filtronic’s manufacturing footprint in the UK and enhance clean room areas, engineering labs and testing facilities. Management is planning to move in this summer and plans to transfer to the new facility in a phased fashion. Management estimates that the move will cost c £5m in terms of capex, which we have already factored in to our forecasts.

Growing the engineering team

In November 2024, Filtronic launched a new design centre at the Cambridge Science Park, providing improved access to engineering talent, research institutions and key industry players. In the last six months, the company has added 30 engineers, including 12 in Cambridge.

Developing advanced RF technology

As well as having engineers focused on delivering specific customer projects, Filtronic is developing chips for the next RF band, gallium nitride (GaN)-based chip designs for three RF bands and GaN-based solid state power amplifiers (SSPAs). GaN-based chips and SSPAs are expected to be production ready in H226. As an example of the advantages of moving from gallium arsenide (GaAs) to GaN, the power output of an E-band SSPA manufactured on GaN can be four to five times as much as if manufactured on GaAs.

Outlook and changes to forecasts

In H125, the company achieved 12 new design wins across nine customers, with the majority in the aerospace and defence sector, for a lifetime revenue of at least £30m. Excluding SpaceX, the sales pipeline is made up of opportunities in the space sector (53%), aerospace and defence (39%, all UK at the moment) and communications (8%). Management estimates it is likely to take two to three years to diversify the customer base.

On 10 February, the company announced it had received a significant new order from SpaceX worth $20.9m (£16.8m) to be fulfilled in FY25 and FY26. We upgrade our FY25 revenue forecast by £2m/4.2% assuming the bulk of this contract is shipped in FY26. We upgrade our FY26 revenue by 4.7%, assuming most of this order supports our existing revenue forecast. Reflecting higher overheads for the investment described above, we upgrade our adjusted EBITDA forecasts by 3.1% in FY25 and 4.1% in FY26 - note that adjusted EBITDA excludes share-based payments and the warrant amortisation.

For FY26, we assume a 14% revenue decline versus FY25, as we expect the pace of orders from SpaceX to moderate as it finishes its programme of retrofitting existing gateway links with E-band SSPAs. We would expect some of the recent design wins in the aerospace and defence market to drive orders in FY26 and we expect SpaceX to continue to contribute a material percentage of orders. Filtronic is working closely with SpaceX to develop solutions beyond E-band and has two-year visibility of the customer’s plans. The main opportunity is for SSPAs at higher frequencies than E-band for ground stations, with payload solutions a longer-term opportunity. Filtronic noted that its first E-band payload solution (Morpheus X2 E-band transceiver) was recently launched into space on Almagest Space Corporation’s ELEVATION-1 E-band satellite.

Our reported operating profit, PBT and net income forecasts are lower due to the amortisation of warrants and higher than expected share-based payments.