Filtronic’s (FTC) announcement of a strategic agreement with Elon Musk’s SpaceX late last month drove a one-day share price pop of almost 50 per cent. This is understandable. Working with the world’s most advanced space technology company is a coup, but some investors with longer memories will remain unimpressed. Filtronic has been here before, enjoying a stellar rise on the back of the dotcom boom before experiencing an equally rapid descent.
The communications equipment specialist was founded by a former electrical engineering lecturer at the University of Leeds, David Rhodes, in the late 1970s. It initially made components for the RAF’s Tornado aircraft and used an Aim listing in 1994 to grow via acquisitions. By 2000, it had become one of the UK’s most successful university spin-outs, with revenues of over £200mn and a market cap in the billions.
But it had ‘bet the farm’ on wireless network technology, in the words of current chief executive Richard Gibbs, and this market collapsed during a lull between the rollouts of 3G and 4G technology.
So, too, did the company’s share price. Over a 20-month period, Filtronic’s shares lost 99 per cent of their value. A dramatic downsizing ensued, and on many measures, the company remains a shadow of its former self. Turnover last year was just £16.3mn, and even after its recent run-up, its market cap has only just topped £100mn.
It is much more focused, though. Having got out of businesses that Gibbs says became “commoditised”, such as the production of telecoms antennas, it is now concentrated on four end markets – aerospace and defence, critical communications, telecoms infrastructure and space. Its engineers have skills that are hard to replicate, designing and manufacturing filters, transceivers and amplifiers of very low radio frequencies (RFs).
“We know where we can excel, and that’s in the non-trendy, hard-to-do analogue bit of engineering where it’s not just applying ones and zeros,” Gibbs said. “It’s accumulated knowledge of how to design very low frequencies and filter out any frequencies you don’t want.”
These skill sets are not widely held, as few universities still train RF engineers, Gibbs said. Their rarity can be vouched for by the fact that SpaceX – a company not known for its love of working with external suppliers – is partnering with it.
This came about because Filtronic had worked with other tech companies such as Meta (US:META) and Alphabet (US:GOOG) on their low-earth orbit projects, which they later abandoned. Some of the engineers on those projects now work at SpaceX and knew Filtronic could build the kit they needed to send signals to and from Starlink satellites to ground stations.
The SpaceX deal
SpaceX placed its first £2.3mn order for Filtronic’s E-band solid state power amplifiers (SSPAs) last year, although confidentiality agreements were in place then. As other deals followed, and Filtronic became a critical supplier, SpaceX formalised the relationship.
It has done this through an agreement that grants it warrants for up to 10 per cent of Filtronic’s shares. Half of these will vest once SpaceX has bought $37mn (£30mn) worth of E-band SSPAs, and the other half will once a similar size of orders is placed for amplifiers operating at other frequencies.
“We’ll get to 5 per cent fairly quickly,” Gibbs asserted, given that SpaceX has just placed its fifth order for E-band SSPAs worth $19.7mn. These will be delivered in Filtronic’s next financial year, which begins in June. The other 5 per cent will vest once equipment for other frequencies is manufactured, which could take around 12-18 months.
House broker Cavendish believes this deal will mark a step change in the company’s fortunes. It is forecasting revenue growth of 50 per cent this year to £24.5mn, and a similar magnitude next year to £36mn. Adjusted operating profit is estimated to rise from £237,000 last year to £3.4mn this year and £6.6mn next.
Filtronic’s shares have doubled in value since the start of this year and have risen four-fold over the past 12 months. They now trade at 38 times Cavendish’s forecast earnings of 1.3p a share, but this falls to 19 times based on next year’s estimate of 2.7p.
The threat of commoditisation
As its history shows, there are not-inconsiderable risks. Gibbs acknowledged that Filtronic lives under the threat of commoditisation because, if the market for its products grows large enough, a major chipmaker like Texas Instruments (US:TXN) or Qualcomm (US:QCOM) could muscle in.
“But by then we’ve generally moved on,” he said. Gibbs, who is 65, is also moving on later this month. With the company planning to take on bigger premises at its main site in Sedgefield and other projects on the go “we need somebody that has got five years – at least – of runway,” he explained.
Filtronic’s relationship with SpaceX seems pretty tight, though. SpaceX’s vice-president of starling engineering, Mike Nicolls, described Filtronic as an “outstanding supplier” and praised the strength of its engineering teams.
“At heart, we’re still an engineering company, and they’re an engineering company,” said Gibbs.
