Anyone that took a punt on Filtronic (FTC)around the 11p mark last year will no doubt be decidedly happy today, given the recent solid progress achieved by the company.
Following a run of positive contract news and what appears to be a building momentum, the shares have proven resurgent and now stand at a more healthier looking 29.5p.
The company has something of a chequered past on the performance front though, with some barren years interspersed with more positive outcomes, which has led over time to a degree of caution on the investment front.
More recently though, the management team here has been delivering across a number of fronts, looking to leverage FTC’s technology products, which is being driven by strong market demand.
Additionally, the company serves major Blue Chip customers across what are significant growth markets and where there appears to be a significant tailwind.
Headquartered with a large facility in Sedgefield along with an arm in Leeds and a US operation, FTC is both a developer and manufacturer of radio frequency, microwave and millimeter wave technologies, serving highly mission-critical communication networks.
This embraces areas such as defence, aerospace and telecommunications, which in the case of the former, the current picture is looking extremely bright for the company.
Following delivery of its Interim Results yesterday, I was fortunate enough to catch up with management to hear more on both the progress that has been made, along with the outlook for the year ahead and beyond.
A quick look at the numbers first though, which at first glance perhaps masks the underlying progress that has been achieved here over the last year.
Revenue for the first six months came out at £8.5m which was marginally ahead of the corresponding period that in turn saw EBITDA of £0.2m which was below the prior year’s £1m.
Increased investment across sales channels and engineering resources played a significant part in that picture though and although impacting the headline numbers is nevertheless set to deliver going forward.
As a result, alongside significant new order wins, broker Cavendish has upped its full year 2024 revenue numbers from £20.5m to £23.5m, with EBITDA moving significantly to £3.7m from the previous £2m.
Pre-tax profit, which is arguably what investors are far more inclined to be focused on, is expected to come out at £2.5m, representing a step change from numbers achieved in previous years.
Speaking with CEO Richard Gibbs along with CFO Michael Tyerman, it was clear that there is a notable degree of confidence regarding the current prospects at FTC and a satisfaction in relation to the first half results.
Gibbs, quickly expands on the orders that have been received and are up and running, citing that they cover all of the four key markets that the company addresses.
He also referred to a specific and significant order that has just been announced which has seen the company as he says, hitting the ground in terms of production volumes and which is driving the second half performance and the first half of next year.
Additionally, with the same customer there is another order which although said to be small, is nonetheless strategically important.
Gibbs added that they were very pleased to get both contracts, which would appear to further underline the increasing opportunities for FTC and importantly with major blue-chip customers.
The orders in question are concentrated around the Low Earth Orbit (LEO) space, which provides for prospects of further contract wins ahead.
Across its key markets, defence is clearly an interesting area, given the current global uncertainties and increased spend and provides for a £25m-£35m opportunity, where FTC provides primary tech products such as serving battlefield communications and cyber applications.
“If you look at the defence opportunity” the CEO commented, “where we can mention customers names such as QinetiQ and BAE, this represents us filling out our portfolio on radar.
We do a lot in aerospace on radar and we have now got BAE Maritime which is our first contract in ship borne radar, whilst Qinetq is a land- based system that goes on the back of a truck. So, we are now covering radar systems on land, sea and air.”
On the Telecom arm of the business which remains of significance, Gibbs said that they continue to work with the major players, but increasingly in relation to servicing a demand for higher performance products.
These, which effectively equate to providing up to 50% more power, also plays out positively for FTC, as they can subsequently charge a premium for the product.
Gibbs added that they have migrated away from the lower value, high volume products that are highly competitive, to those of a more value oriented high-end performance.
Commenting specifically on the first half results the CEO said, “it was a pleasing performance, progress was made in developing our order book and strategically making some pretty interesting in-roads.
CFO Tyerman also spoke on the numbers and expressed confidence in delivering the full year 2024 forecasts given the strength of order book, “we have said all along that we have got manufacturing capability of somewhere around £25m-£30m over the last couple of years and we are going to test that in the second half of the year.
So given the ramp up, we have got to get our own production up to speed and the supply chain up to too, but we are confident in our ability to meet that number.”
Speaking of next year’s 2025 numbers for which broker Cavendish has forecast a small uptick in revenue but a shaving down on pre-tax profit to £2.3m, the CFO added, “moving into 2025 the order book is also very strong and we have recently announced that to be at £25m.”
Given this current picture, Tyerman added that they don’t really need that much in terms of contract wins to hit the 2025 numbers out in the market.
This suggests to me that the forecast figures are potentially on the conservative side and the CFO concurred that he likes to think that it is the case, which arguably implies a couple of more decent wins would push the numbers further northwards.
Given the current economic and geopolitical instability it is however right in my view to not over promise, although given defence and aerospace appears to be thriving under such circumstances, then FTC with substantial orders in the bag looks well placed for further progress.
One point worth noting in relation to the contracts and projects that FTC is aligned to, is that they have extremely lengthy lead times as CEO Gibbs pointed out. “The BAE radar one has been in the works for seven years and the QinetiQ one was identified twelve years ago where we got a line of sight about two years ago.
The defence stuff continue to have a long development cycle, but once you get the order and you are designed in, you have got a long runway and repeat orders.”
Telcos by contrast are relatively quick I am told, with an eighteen months design cycle, which is a sharp contrast to the aforementioned.
There is of course the increasingly important space contracted work in the mix too and this sees Gibbs speaking extremely positively about the sector. “The space stuff is happening at an incredible rate, where it goes from an idea to where within twelve months you are shipping in high volume.”
The space opportunity which FTC is ideally placed to serve with its in-house know-how is clearly a sizable one, with Gibbs telling me that they believe it is between £100m-£300m in the next three to four years.
Referring to the most recent contract news on this area, the CEO commented, “We are actually addressing two parts of the market, the ground station which is the link from ground to the satellite and also satellite to ground.”
The area alone is clearly a sizable growth opportunity and in relation to the current orders, Gibbs said that they are really trying to get up to speed and they now have three shift patterns in place.
With exposure to different markets with differing lead times, there is obviously bound to be a degree of lumpiness, but that diversity also brings some balance, along with increasing growth opportunities.
Given the gathering momentum, I ask the question as to whether now may be the time for expansion in terms of the existing facilities where Gibbs replied. “I wouldn’t say it’s a big drama, we may take on some more space, but at the moment we think now is the time to really sweat the assets we have got and let that drop through to the bottom line.”
Although UK based, FTC does, as mentioned at the outset, have an operation in the US which is essential in terms of winning any business across that nation’s vast defence market, so I was keen to hear of what the story was there.
“Interestingly we have been having conversations about that since we came back in the new year and it is an area of interest for us, so we are certainly going to use some of the cash that will be generated to look at opening up the US opportunities.”
Gibbs didn’t want to expand at this point in time, but did add that the US defence market is huge and you only need a small part of it to make a difference and there are opportunities there for FTC.
In terms of the balance sheet, the CFO is comfortable with the current picture and feels that they have a good platform on which to achieve their goals, where he also believes there will be a healthy amount of cash some eighteen months down the line.
FTC is looking a whole lot healthier than a few years back and although the shares have performed strongly over the last twelve months they could have some way to run over the next few years.
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