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Filtronic expecting short-term supply issues to ease

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Filtronic [LON:FTC] the Durham-based electronic components business, with operations in Leeds and Maryland, US has started the year well.

The AIM-listed manufacturer ended January with a new GBP2.3m contract announcement with an unnamed US customer to supply its Cerus sold state power amplifier for use on the terrestrial-based systems that will control Low Earth Orbit (LEO) satellite communications equipment.

The contract win was a bit of a feather in the cap for Filtronic, as this project will be the first time that high bandwidth E-band frequencies have been used in an operational LEO application.

Then earlier this month, the company published its interim half-year results for the six months ended 30th November 2022, where it reported revenues of GBP8.4m, up 5% on the corresponding period in 2021.

However, pre-tax profits were down to GBP440,000 from GBP684,000 in the corresponding period, with operating profits decreasing from GBP721,000 to GBP483,000, something the company blamed upon increased investment into its engineering and sale divisions, higher costs and “an adverse first-half sales mix”, which was partially mitigated through strong US dollar sales.

Supply chain issues

The company has been trying to source cheaper materials, and is, like much of the electronics industry facing a global semiconductor shortage and has been scouring the secondary market for alternative suppliers to no avail. The supply shortage is, according to a company statement: “impacting our ability to meet customer schedules in the second half.”

Nevertheless, Filtronic has a current outstanding order book of GBP17m and warned that the supply issues may “result in weaker trading in FY2023 than current market expectation.” However, the company believed that eventually the supply issue would unwind and investors could: “expect an uplift in revenue and a resumption to plan in FY2024.”

Originally founded in a West Yorkshire garage, by Leeds University electronics and electrical engineering professor, David Rhodes, the company developed into a supplier of electronic warfare components. By the 1990s Filtronic was supplying to the UK and US defence industry and listed on the main market in 1998. The company currently designs and manufactures high performance bespoke RF, Microwave and mmWave solutions for the aerospace, communications and defence industries.

Richard Gibbs, Filtronic’s chief executive explained to The Armchair Trader: “We started out in the 80s as a defence contractor, and then in the 1990s rode the telecoms boom and grew through acquisition. The company bought a semiconductor foundry in Newton Aycliffe as well as several small, related businesses; in hindsight, some of the acquisitions were a bit reckless.”

Gibbs explained that as the telecoms bubble burst in the early 2000s taking many of the nascent tech companies with it, Filtronic survived and disposed  of many of its supplementary businesses.

“We were quite popular in the City in the 2010s,” said Michael Tyerman, Filtronic’s chief financial officer, “as we returned around GBP120m to shareholders [at the time].”

Realigned focus

The company divested from its last supplementary business in 2020, and since then Filtronic has focused upon the core areas of Aerospace & Defence, High-altitude platform station (HAPS) systems and LEO Space, Telecoms Infrastructure and Adjacent Market Applications in core semiconductor technology coupled with a hybrid manufacturing capabilities.

The recent contract is a wayfinder for Filtronic, in that it opens the door for the company in the rapidly growing Near Space Orbit market, an area that is growing in importance with a significant uptick in commercial, defence and sovereign expenditure. Gibbs said that global spending on aerospace & defence, telecommunications infrastructure and low earth orbit commercial space applications is increasing, underpinned by exciting technological advancements. “We have also seen governments re-evaluate critical infrastructure supply with an emphasis on security and national resilience,” he said.

The company handles the data backhaul from LEO facilities and Gibbs argued that the areas Filtronic is operating in have high barriers to entry, especially seeing the company has developed an historic reputation in the areas it is now focusing upon, with demand for data backhaul, battlefield communications, filters and high frequency bandwidth all growing in strategic importance and expenditure.

Near space expansion

Tyerman said that the supply chain issues that the industry has experienced since the Coronavirus pandemic was something that the company and the industry has been wrestling with. The company has been scouring the secondary market for supply and significantly built up its inventory, “as [growing the company’s inventory] was the best strategic use of assets at the time.” This obviously led to an outflow of funds, which affected short-term profitability.

But Gibbs said: “the industry is starting to recover,” lead times are still around six months, but have pared back from the 12- to 18-month lead time the company was experiencing recently. Gibbs added, given the fact that Filtronic design their system ground-up, the company could alter its circuit board designs to accommodate components sourced from the secondary market.

Additional supply is coming onto the market, and as a result of the recession, demand from the consumer side of the electronics industry is dampening, providing more component supply for other sectors of the electronics industry.

Higher-quality customers

The company is committed to investing in its sales and engineering facilities. Also, the quality of customer is improving – with more demand from aerospace and defence customers, which are high revenue clients. This is being buttressed by LEO clients, who Gibbs believes will also be high quality clients.

Filtronic is focussed on the ‘D’ side of R&D said Gibbs. There is a dearth of semiconductor supply in the market, but he explained as new fabs open up, Filtronic is first-in-line to see how the new products can be integrated into its equipment. “We set out to enable the future of RF (Radio Frequency,” Gibbs said.

The company is debt-free, said Tyerman, and is a net cash position. Running at a 11% EBITDA margin, Tyerman believes that given the upwards curve in incoming sales enquiries, and an easing of supply chain issues over the medium term that an EBITDA of 20% is “entirely feasible” by FY 2024/25.

Cash generative

Filtronic is a cash-producing business, that is sensibly and sustainable run. It operates in a market that shows strong growth momentum. The War in Ukraine has not harmed the company’s prospects and brought into focus the need for national governments to invest in their electronic warfare capabilities, as well as tactical battlefield communications systems, which is bread and butter for Filtronic.

Moreover, 5G rollout is an ongoing theme globally with 6G to follow, and the demand for data backhaul will only intensify in the next few decades. The Race for Space, especially in the lower space orbit at the edge of the stratosphere has also been given heightened importance in the last few weeks, as fleets of surveillance balloons have been spotted floating across North America, and lawmakers are debating how to control their near-space territory. Increased commercial space exploration and exploitation also plays into Filtronic’s hands.


The sky is the limit for the company literally, and from its origins in a garage, Filtronic has evolved to become a part of the future industrial development in the UK and beyond.

Filtronic’s shares opening the day (16th February) at 14p. and returned 3.9% from the beginning of the year and 16.5% over one year with its shares ranging between 8.5p and 17.3p over a 52-week period.

Edison, the broker covers Filtronic. Anne Margaret Crow, an analyst for Edison said: “The recent satcom 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 FY25 onwards, further uplift in Filtronic’s share price can be justified.”

finnCap has a target price of 20p for Filtronic, Lorne Daniel, director of research said: “Demand remains strong, with clear sales drivers across all key markets. As revealed last week, the ongoing global component supply issues have led to a shortage of some specific, unique components which will delay some orders beyond the May YE, into FY24. This business is delayed, not lost; the scarcity means that the current prices of these subcomponents is uneconomic and so – in consultation with the customers – management has decided to delay production and shipment for a few months until prices become more sensible. This is a short-term issue which pushes trade into FY24 and our forecasts reflect that: 24% yoy growth in FY24, delivering GBP2.0m adj. EBITDA. Looking across FY23 and FY24 we target c.10% compound growth.”

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This article does not constitute investment advice. Do your own research or consult a professional advisor.

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