Is Filtronic’s crash an opportunity?

For investors still on board at Filtronic (FTC), there was yet more frustration today as the wireless communications firm revealed that its lumpy revenue performance will continue to hold back profit hopes over the next six months.

Shares slumped 22% to just below 9p, leaving the Yorkshire-based company close to the all-time low seen in mid-2015. At the height of the tech boom in 2000, the stock peaked at £23.50 as the then loss-making business was valued at £1.5 billion. Now that valuation is below £20 million.

While there have been plenty of false dawns in the Filtronic recovery story over the past few years, there remain a few good reasons to consider backing the AIM-listed company despite this latest setback.

One of the big hopes is the significant progress that is being made in positioning Filtronic as a premier technology partner on 5G. This is the next generation of mobile technology that will mean much greater data speeds, along with capacity for a massive increase in devices compared to 4G networks.

It’s unlikely that consumers in the UK will see the benefit of 5G for another five years, but as far as Filtronic is concerned the hard work is already underway. That’s why it is significant that the company has been approved as one of the vendors to a major US mobile network operator for a 5G evolution antenna.

The company is hopeful that this approval will open up further opportunities, particularly due to the fact that 5G networks will use far higher frequencies and this could play to Filtronic’s strengths.

But that’s for the longer term. In the meantime, Filtronic has struggled to iron out the lumpy nature of its sales and profits performance.

The latest blow stems from a multi-year defence contract in which production is taking longer than initially expected due to supply issues with a customer specified component. As a result, the group now expects the second half performance for this financial year to be broadly similar to the first half.

This led Panmure Gordon to downgrade its revenue and operating profit forecast for the full year by 35% and 45% respectively. Analyst Sanjay Jha also cut his share price target by 35% to 18.9p, although he remains positive about the potential for a recovery.

He noted that the company was still profitable in the first half, despite a 41% fall in sales to £12.8 million: “Notwithstanding the swings in the P&L, the balance sheet remains strong with net cash of £2.8 million at the end of November, compared with £2.6 million in May.” Jha’s forecasts are based on a projected 2018 PE ratio of 14.7, rising to 19.8 in 2019.

Filtronic is already well focused on efforts to smooth out the flow of business by broadening the company’s customer base and the markets it serves.

In particular, the company has been developing solutions that can be supplied directly to mobile network operators, such as in the case of the 5G antenna agreement. It is also looking to shift its focus from supplying commodity products towards technology-led solutions.

Progress in this area has already seen the award of a development contract for a high band antenna that will enable network operators to significantly increase capacity in their networks in readiness for the higher frequencies of 5G.

Other landmarks include strong demand for filter products to supply the wireless telecoms and public safety communications markets.

Chairman Reg Gott said: “Whilst the group continues to make good progress and is delighted to have been selected for key projects on the developing 5G roadmap, we are mindful that until we still further widen our customer base the business will continue to be subject to volume swings.”

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.