Small-cap RF components manufacturer Filtronic (LON:FTC) put out a rather sombre RNS today, citing an expected loss for the current year caused by poor take-up of one of its new products, the Massive MIMO antenna. As a small-cap, the share price reaction was expected to be severe, and in early trading the shares lost over 50% of their value:
The bigger picture is that the share price has simply returned to what it was before. The year chart shows that Filtronic have been at this level for most of the year, with excitement building towards the autumn sending it to 29p at the end of September on the back of a contract win. Since then a series of cautionary outlook statements have sent the price into a spin.
The RNS read as follows:
Sales in the first half of the financial year were £10.4m (H1 FY2018: £12.8m). Whilst sales were lower than the prior year we have traded ahead of our internal sales projections in the half. However, despite good early take up, we regret to report that demand for the recently introduced Massive MIMO (“mMIMO”) antennas is now expected to be substantially lower than we had forecast in the second half of FY2019 and as a result, the Company expects to be loss-making for the current financial year.
There is no hiding the words ‘loss-making’, although the scale of these losses are not disclosed. To their credit, there is a fairly robust explanation:
Our predominant OEM customer, with whom we had closely collaborated in the development of this product range, has now significantly lowered its forecast demand below that which it had previously provided, having itself been advised that its lead client is now looking to deploy different frequencies to those it had originally indicated. As a consequence of this lower demand and the uncertainty it brings, the Board has decided to impair fully the net book value of the capitalised development costs of £0.5m relating to the development of mMIMO in its half year results. The Company has made considerable efforts to diversify its customer base in recent years and despite this obvious set back to our mMIMO antennas business, we are pleased to advise that we were recently approved as a supplier of a niche antenna product to a Tier 1 Mobile Network Operator in South Africa. However, given the importance of mMIMO to our future plans in the antenna business, the Board has commenced a review of its options for this component of the Group.
It ends on a cautionary note:
Net cash at 30 November 2018 was £2.3m (H1 FY2018: £3.1m). The Board is of the opinion that it has sufficient cash reserves to allow it to operate at this lower level of revenue whilst it explores and executes an alternative strategy for the antenna business.
Filtronic specialise in the manufacture of wireless components, for which there are a wide range of applications, from the consumer use to business to military. Operating under two segments, Broadband and Wireless, the company went public in 1999. Since topping over 300p in the dot-com boom it has provided little or no growth for shareholders, having traded in a relatively narrow band for the next 15 years, rarely troubling 100p.
The business used to be much bigger, also being involved in the manufacture of antennas for mobile phones. However, this division was sold off to pay off company debt and also fund reinvestment. It is hard to picture the sale as much of a success. Recently results here have not been good, no profits and certainly no dividends. A recovery began in 2017 with a return to profit but it seems from today’s news that this will be short-lived.
Last year’s profit was £1.7m before an adverse forex affect of £0.5m, giving a PBT of £1.2m. As can be imagined for a business of this type, many of its development costs are capitalised and there are £5.3m of intangibles on the balance sheet, but this is outweighed by current assets.
It should be noted that the business is disproportionately reliant on its biggest customers. An excerpt from the financial statement shows:
These three customers make up the majority of the groups business. Given the size of organisation Filtronic work with, the risk is not particularly of one of these large customers not fulfilling a bill, but the loss of one of these large customers would have a massive effect on the business. Revenues have dropped sharply in the past year, although that was not attributed to a loss of customer, but rather moving away from lower margin products.
The trend for net cash is downward – £2.3m as of November, which is down from £3.1m in H1 and £3.6m last year end. As the report notes, they believe there is sufficient to last while they consider another strategy, and that is backed by unused finance facilities. However, it goes without saying that this type of cash will not last forever.
I haven’t looked into this in any great detail, as it is evident that there isn’t any specific need to use Filtronic (as opposed to anyone else). The share price will always be volatile whilst the customer concentration as it is, and at the current share price could even be a takeover target for a competitor or even one of the larger customers, depending on who they were.
The profitability record of the company is quite mixed, and the overall impression is that whilst management is good value for shareholders (the salary for the entire board is less than one executive’s pay in other firms) it is in a very difficult market segment and it would be hard to grow revenues.
Don’t really have enough knowledge of the products to even guess where this might end up. The only thing we can gather now is that the trend for profits and cash is down, and they will need to do something about it. 3/5.