Filtronic — Scaling up for future growth

TMT

Filtronic

Scaling up for future growth

FY24 results

Tech hardware and equipment

5 August 2024

Price	68p
Market cap	£149m
Net cash (£m) at end FY24 (including PPE lease liabilities)		5.2

Shares in issue	218.5m
Free float	66.1%
Code	FTC

Primary exchange	AIM
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	(5.8)	31.0	309.4
Rel (local)	(6.7)	30.2	277.3

52-week high/low

77p

15p

Business description

Filtronic is a designer and manufacturer of advanced radio frequency communications products, supplying a number of market sectors including mobile telecommunications infrastructure, space, public safety and aerospace & defence.

Next events

AGM	31 October

Analyst

Katherine Thompson

+44 (0)20 3077 5700

tech@edisongroup.com

Edison profile page

Filtronic is a research client of Edison Investment Research Limited

FY24 was a pivotal year for Filtronic, with revenue growth of 56% and operating margins expanding 12.7pp to 14.2%, as adoption of its technology in the space market accelerated. Orders from Filtronic’s largest customer drove a marked step up in revenue in H224 and support our FY25 forecasts. The company is focused on diversifying and scaling the business to support sustained revenue and earnings growth.

Year end	Revenue (£m)	EBITDA* (£m)	PBT* (£m)	Diluted EPS* (p)	DPS (p)	P/E (x)
05/23	16.3	1.3	0.1	0.06	0.0	N/A
05/24	25.4	4.9	3.4	1.43	0.0	47.5
05/25e	35.2	8.0	5.7	2.45	0.0	27.7
05/26e	40.0	9.0	6.5	2.78	0.0	24.5

Note: *EBITDA, PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Strong operational leverage in FY24

FY24 revenue increased 56% y-o-y to £25.4m driving adjusted EBITDA up 285% to £4.9m and the operating margin up to 14.2% from 1.5% in FY23. Revenue and profit were heavily weighted to H224 reflecting the delivery of several orders for SpaceX. Higher profitability and partial prepayment of one customer contract resulted in an increase in cash from £2.6m at end-FY23 to £7.2m at end-FY24. Our FY25 revenue and EBITDA forecasts are substantially unchanged while we increase our depreciation and amortisation estimates to reflect higher capex. For FY26, we introduce forecasts for revenue growth of 14% and EPS growth of 13%.

Building the foundations for sustained growth

Filtronic views the space and aerospace & defence markets as offering the greatest growth potential, with recent contract wins in both sectors supporting FY25 revenue growth. Building on steps taken in FY24, the company plans to invest in business development, manufacturing and R&D during FY25 to help win business from new customers, to develop new products and to provide sufficient capacity to meet production orders.

Valuation: Growing confidence

The stock has more than doubled since the SpaceX strategic agreement was signed in April, after a material FY25 estimate upgrade. The stock now trades on a P/E of 27.7x FY25e and 24.5x FY26e. Using a 10-year reverse discounted cash flow with a WACC of 8%, the current share price is arrived at using revenue growth of 11.7% per year for FY27–34e and EBITDA margins growing from an estimated 22.6% in FY26 to 24.8% over the 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 FY24 results

Exhibit 1 summarises Filtronic’s FY24 performance.

Exhibit 1: FY24 results highlights

£m	FY23a	FY24e	FY24a	Diff	y-o-y
Revenues	16.3	25.4	25.4	0.2%	56.3%
EBITDA	1.3	4.8	4.9	1.8%	N/A
EBITDA margin	7.8%	18.9%	19.2%	0.3pp	11.4pp
Reported operating profit	0.2	3.5	3.6	2.4%	N/A
Reported operating margin	1.5%	13.9%	14.2%	0.3pp	12.7pp
Reported PBT	0.1	3.3	3.4	2.1%	N/A
Normalised net income	0.1	3.3	3.2	(3.2%)	N/A
Reported net income	0.5	3.3	3.1	(4.6%)	N/A
Normalised basic EPS (p)	0.07	1.52	1.47	(3.3%)	N/A
Normalised diluted EPS (p)	0.06	1.50	1.43	(4.9%)	N/A
Reported basic EPS	0.22	1.52	1.45	(4.7%)	N/A
Net debt/(cash)	(1.6)	(5.2)	(5.2)	1.1%	228.7%

Source: Filtronic, Edison Investment Research

Filtronic reported revenue in line with its recent trading update. EBITDA was slightly ahead of expectations resulting in an EBITDA margin of 19.2% for the year, 11.4pp higher than in FY23. The operating margin also increased substantially to 14.2%. The company reported a small tax charge that resulted in reported net income and basic EPS slightly below our forecast. The average diluted share count was higher than expected, reducing diluted EPS. At the end of FY24, Filtronic had a cash position of £7.2m offset by leases totalling £3.0m. Adding back property leases of £1.0m, the company had a net cash position of £5.2m at the year end.

Space market drives strong growth

Exhibit 2: Revenue by end market	Exhibit 3: Revenue contribution by end market

Source: Filtronic	Source: Filtronic

Exhibit 2: Revenue by end market

Source: Filtronic

Exhibit 3: Revenue contribution by end market

Source: Filtronic

The charts above show the contribution to revenue by end market. Revenue from telecoms backhaul (Xhaul) declined 12% y-o-y, reducing to 21% of revenue from 38% a year ago, as telecom operators worked through their excess 5G equipment inventory. As SpaceX ramped up production orders through 2023 and 2024 to date, revenue from the space market grew to £12.8m from £2.0m in FY23 and contributed half of FY24 revenue. Filtronic noted that SpaceX made up 48% of FY24 revenue; we assume the European Space Agency made up the remaining 2%. Revenue from the aerospace and defence market declined 49% y-o-y mainly due to shortages of components delaying delivery. Revenue from critical communications increased 53% y-o-y, mainly generated from supplying the P25 market in the US and helped by the unwind of global semiconductor shortages.

Strategic priorities in FY25

Recently appointed CEO, Nat Edington, highlighted the main areas of focus for the current year.

Diversifying the customer base

Management is conscious that it has a very concentrated customer base, with the top three customers making up 84% of FY24 revenue. In recent years, Filtronic has worked to diversify the end markets and applications for its technology to reduce its dependence on the telecoms sector. This strategy has borne fruit attracting customers for applications such as private networks and high frequency trading as well as increasing penetration of the fast-growing space market, with the April strategic agreement with SpaceX affirming the company’s ability to design and manufacture to exacting requirements. The company views space and aerospace & defence as the most attractive growth markets and is talking to the major industry players in each area.

Staying at the forefront of RF technology

Key to being a leader in RF technology is the ability to hire and retain highly qualified RF engineers. This is a relatively niche area of technology and Filtronic is taking a multi-pronged approach to attracting scarce talent. This includes working with academia, offering graduate and apprenticeship programmes, and may entail setting up an engineering facility in a new location if this helps attract experienced engineers. So far this year, headcount has increased from 133 to 140 solely from R&D engineering hires.

R&D spend is a key performance indicator for the business and the company aims to spend c 13% of revenue on R&D. In FY24, this metric was 11% based on R&D spend of £2.8m before adjustments for capitalisation and amortisation of development costs. This was lower than the target as it was a challenge to grow R&D resources at the same pace as revenue. R&D encompassed both customer-funded development work as well as progressing the technology roadmap, including product development for low Earth orbit space ground station and payload applications, private networks and aerospace and defence. The company is focused on developing monolithic microwave integrated circuits and modules for the V, W and D frequency bands that it aims to launch in FY26, as well as developing gallium nitride wafer processes.

Building a scalable organisation

In recent years, management has noted that it had a sub-scale cost base. As revenue ramped through FY24 (H124 £8.5m, H224 £17.0m), the company was able to support a 56% increase in revenue with a 24% increase in operating expenses and achieve a 14% operating margin. Through the year, Filtronic has worked to prepare the business for a higher level of revenue and invested in new test and manufacturing equipment, hiring R&D engineers (headcount grew from 33 in FY23 to 39 in FY24) and developing the sales channel.

In FY25, it plans to move premises in Sedgefield to provide enough space for increased levels of production as it is operating close to full capacity. Additional capex is planned to increase manufacturing capacity. To provide security of supply, Filtronic is adding second source suppliers. The company also plans to add more business development resource to support customer diversification.

Moving up the value chain

Filtronic is keen to supply more than components or modules and is considering supplying sub-systems. It is also planning to expand into the digital RF domain.

Outlook and changes to forecasts

Orders already received from SpaceX should support a large proportion of our FY25 revenue forecast. The company also noted that the aerospace and defence market is likely to contribute higher revenue in FY25 as component shortages are no longer a problem. We introduce forecasts for FY26, where we assume Filtronic continues to receive a material level of orders from the space market with modest growth from other verticals. We have raised our capex forecast for FY25 taking into account the company’s plans to move to a new location in Sedgefield, with a proportion of this spend financed by leases.

Exhibit 4: Changes to forecasts

£m	FY25e old	FY25e new	Change	y-o-y	FY26e new	y-o-y
Revenues	35.1	35.2	0.2%	38.4%	40.0	13.6%
EBITDA	7.9	8.0	1.2%	62.6%	9.0	13.6%
EBITDA margin	22.4%	22.6%	0.2pp	3.4pp	22.6%	0.0pp
Reported operating profit	6.2	6.1	(2.1%)	67.6%	6.8	12.9%
Reported operating margin	17.6%	17.2%	(0.4pp)	3.0pp	17.1%	(0.1pp)
Reported PBT	5.9	5.7	(3.9%)	70.1%	6.5	13.7%
Normalised net income	5.9	5.7	(3.9%)	79.4%	6.5	13.7%
Reported net income	5.9	5.7	(3.9%)	82.1%	6.5	13.7%
Normalised basic EPS (p)	2.74	2.63	(4.2%)	78.2%	2.97	13.3%
Normalised diluted EPS (p)	2.64	2.45	(6.9%)	71.6%	2.78	13.3%
Reported basic EPS	2.74	2.63	(4.2%)	80.8%	2.97	13.3%
Net debt/(cash)*	(5.8)	(6.1)	4.4%	16.2%	(11.1)	82.8%

Source: Edison Investment Research. Note: *Excludes property lease liabilities.

Exhibit 5: Financial summary

Year end May	£m	2021	2022	2023	2024	2025e	2026e
INCOME STATEMENT
Revenue		15.6	17.1	16.3	25.4	35.2	40.0
EBITDA		1.8	2.8	1.3	4.9	8.0	9.0
Operating profit (before amort. and excepts.)		0.6	1.6	0.2	3.7	6.1	6.8
Amortisation of acquired intangibles		0.0	0.0	0.0	0.0	0.0	0.0
Exceptionals		0.1	0.4	0.0	0.0	0.0	0.0
Reported operating profit		0.6	2.0	0.2	3.6	6.1	6.8
Net Interest		(0.4)	(0.1)	(0.2)	(0.2)	(0.3)	(0.3)
Exceptionals		0.0	0.0	0.0	0.0	0.0	0.0
Profit Before Tax (norm)		0.1	1.5	0.1	3.4	5.7	6.5
Profit Before Tax (reported)		0.2	1.9	0.1	3.4	5.7	6.5
Reported tax		(0.2)	(0.4)	0.4	(0.2)	0.0	0.0
Profit After Tax (norm)		0.3	1.2	0.1	3.2	5.7	6.5
Profit After Tax (reported)		0.1	1.5	0.5	3.1	5.7	6.5
Discontinued operations		0.0	0.0	0.0	0.0	0.0	0.0
Net income (normalised)		0.3	1.2	0.1	3.2	5.7	6.5
Net income (reported)		0.1	1.5	0.5	3.1	5.7	6.5

Average Number of Shares Outstanding (m)		213	215	215	216	218	219
EPS - normalised (p)		0.14	0.54	0.07	1.47	2.63	2.97
EPS - normalised fully diluted (p)		0.14	0.53	0.06	1.43	2.45	2.78
EPS - basic reported (p)		0.03	0.68	0.22	1.45	2.63	2.97
Dividend (p)		0.00	0.00	0.00	0.00	0.00	0.00


BALANCE SHEET
Fixed Assets		6.2	5.4	7.4	8.2	12.3	13.2
Intangible Assets		1.7	1.5	1.8	2.3	2.9	3.6
Tangible Assets		3.3	3.0	4.3	4.9	8.4	8.6
Investments & other		1.2	0.9	1.3	1.0	1.0	1.0
Current Assets		8.4	11.1	10.7	17.0	20.6	27.1
Stocks		2.2	2.6	2.8	3.3	4.5	5.1
Debtors		3.3	4.5	5.3	6.6	8.2	9.3
Cash & cash equivalents		2.9	4.0	2.6	7.2	7.9	12.7
Other		0.0	0.0	0.0	0.0	0.0	0.0
Current Liabilities		(3.6)	(4.0)	(4.8)	(8.2)	(9.0)	(10.1)
Creditors		(2.4)	(3.0)	(3.7)	(5.4)	(7.2)	(8.3)
Short term borrowings including lease liabilities		(0.6)	(0.5)	(0.6)	(0.9)	(0.9)	(0.9)
Other		(0.6)	(0.5)	(0.5)	(1.9)	(0.9)	(0.9)
Long Term Liabilities		(1.7)	(1.4)	(1.7)	(2.3)	(3.5)	(3.2)
Long term borrowings		(1.6)	(1.3)	(1.7)	(2.1)	(3.3)	(3.1)
Other long term liabilities		(0.1)	(0.1)	(0.0)	(0.1)	(0.1)	(0.1)
Net Assets		9.4	11.0	11.5	14.8	20.5	27.0
Minority interests		0.0	0.0	0.0	0.0	0.0	0.0
Shareholders' equity		9.4	11.0	11.5	14.8	20.5	27.0

CASH FLOW
Op Cash Flow before WC and tax		1.8	2.8	1.3	4.9	8.0	9.0
Working capital		1.1	(0.8)	(0.4)	1.5	(2.1)	(0.6)
Exceptional & other		(1.0)	0.3	0.0	0.0	0.0	0.0
Tax		0.5	0.0	0.0	(0.0)	0.0	0.0
Operating Cash Flow		2.5	2.3	0.9	6.3	5.8	8.4
Capex (including capitalised R&D)		(0.4)	(0.3)	(1.5)	(1.6)	(3.9)	(2.3)
Acquisitions/disposals		0.0	0.0	0.0	0.0	0.0	0.0
Net interest		(0.2)	(0.2)	(0.2)	(0.2)	(0.3)	(0.3)
Equity financing		0.0	0.0	0.0	0.1	0.0	0.0
Dividends		0.0	0.0	0.0	0.0	0.0	0.0
Other		0.0	0.0	0.0	0.0	0.0	0.0
Net Cash Flow		1.9	1.9	(0.8)	4.6	1.6	5.8
Opening net debt/(cash)		0.7	(0.8)	(2.2)	(0.3)	(4.2)	(5.1)
FX		0.0	0.0	0.0	0.0	0.0	0.0
Other non-cash movements		(0.4)	(0.4)	(1.1)	(0.7)	(0.8)	(0.8)
Closing net debt/(cash) including lease liabilities		(0.8)	(2.2)	(0.3)	(4.2)	(5.0)	(10.1)
Property lease liabilities		1.2	1.0	1.3	1.0	1.0	1.0
Closing net debt/(cash)		(2.0)	(3.2)	(1.6)	(5.2)	(6.1)	(11.1)

Source: Filtronic, Edison Investment Research

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General disclaimer and copyright

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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.

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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