Partnership with SpaceX fuels growth
On 24 April, Filtronic (LON:FTC) entered into a strategic partnership and commercial agreement with SpaceX. The strategic partnership includes the supply of E-band solid state power amplifiers (SSPAs) as well as the development and supply of similar products at other frequency bands within SpaceX’s Starlink platform. As part of the partnership agreement, Filtronic has issued 21.7m warrants to SpaceX across two tranches to enable SpaceX to subscribe for up to 10% of the company’s existing share capital at an exercise price of 33p (closing price on 23 April). If fully exercised, this would generate proceeds of £7.16m. The vesting of the warrants is dependent on a regular flow of orders from SpaceX over a five-year period.
Material upgrade to forecasts
Filtronic now expects FY24 revenue marginally ahead of market estimates and EBITDA significantly ahead. The £15.8m order is scheduled for delivery in FY25 and management now believes FY25 revenue and EBITDA will be significantly ahead of current market expectations. We raise our revenue forecasts by 3% in FY24 and 45% in FY25 resulting in EPS upgrades of 19% and 142%, respectively.
Valuation: Contract drives step change in valuation
After the share price gained 48% on the announcement, Filtronic is trading on a P/E of 37.0x FY24e and 17.8x FY25e. Using a reverse discounted cash flow with a WACC of 8%, the current share price is arrived at using revenue growth of 6% per annum for FY26–28, growth thereafter of 3% and EBITDA margins growing to 23.7% from the 22.4% forecast in FY27. In our view, the relationship with SpaceX provides potential for higher growth than this, considering ongoing E-band production orders, the existing satellite payload development agreement and the new agreement to develop SSPAs at frequencies other than E-band.
Development of SpaceX relationship
Filtronic made its first announcement of a $2.8m order for E-band SSPAs for use in trials in LEO satellite ground stations in January 2023 with an unnamed customer. At that time, SpaceX’s Starlink project was the leading LEO satellite service provider and had announced that it would add E-band backhaul functionality to its v2.0 mini satellites, which it started launching in February 2023.
Further orders were received from the same customer in September 2023 ($4.25m), December 2023 ($6.0m) and February 2023 ($9.9m) when it also agreed to develop a prototype E-band module that would form part of the satellite payload and provide downlink connectivity to E-band ground stations.
Yesterday’s agreement names this customer and puts the company’s relationship on a more structured footing. As part of the agreement, SpaceX has placed a $19.7m/£15.8m order for E-band SSPA modules scheduled for delivery in FY25. Filtronic will also work with SpaceX to develop similar products at other frequencies.
The Starlink network is the most advanced LEO satellite network, with more than 5,700 satellites in orbit compared to the next largest network, Eutelsat OneWeb, with 648 satellites. With volume orders already underway for Starlink’s ground stations, development work underway for satellite payload and potential to supply additional frequencies for both, this relationship has scope to provide material and repeating revenues for at least the next five years.
Warrants could generate proceeds of £7.16m
As part of the strategic partnership, Filtronic has issued 21,712,109 warrants to SpaceX, across two tranches, which would enable SpaceX to subscribe for up to 10% of the company’s existing share capital. The warrants will vest on a variable basis, dependent on the volume and timing of orders placed by SpaceX and have an exercise price of 33p (closing price on 23 April). The warrants will vest in full once c $60m/£48m of orders have been placed. The warrants expire five years from the date of signing the strategic partnership contract (ie 24 April 2029). Vested warrants can be exercised in full or in minimum amounts of 500,000 at any time prior to expiry.
The details of the two tranches are as follows:
- Tranche 1: warrants for up to 10,856,055 shares (up to 5% of existing share capital). Warrants will vest on the receipt of purchase orders against a staged vesting profile for E-band SSPAs. All warrants will vest once $37m/£30m of irrevocable purchase orders have been placed. We estimate that 53% of tranche 1 warrants will have vested on receipt of the order described above.
- Tranche 2: warrants for up to 10,856,055 shares (up to 5% of existing share capital). Warrants will vest on the receipt of purchase orders against a staged vesting profile for SSPAs modules at other frequency bands. All warrants will vest once $23m/£18m of irrevocable purchase orders have been placed.
A further condition is that SpaceX must place a minimum order value of $10m in each subsequent 12-month period from the contract date to be delivered within 12 months. The timing between purchase orders must not exceed 12 months. If the order flow is not maintained in accordance with these conditions within the five-year warrant period, the warrants will expire six months from that date.
21,512,000 of the warrants are being issued using existing shareholder authorities granted at last year’s AGM. The remaining 200,109 warrants are subject to approval at this year’s AGM.
Changes to forecasts
We have increased our FY24 revenue forecast by 3% to £24.2m. This results in a 12% increase in EBITDA to £4.3m and an increase in diluted normalised EPS of 19% to 1.27p.
For FY25, the £15.8m order drives a 45% increase in revenue to £35.1m. We assume that Filtronic will make further investment in manufacturing facilities and product development (both equipment and staff) to ensure product delivery to schedule, increasing opex by £2.7m and capex by £2.5m. Excluding any warrant proceeds, we forecast net cash (including lease liabilities of £1.0m) of £4.0m by the end of FY25. We estimate that around half of the tranche 1 warrants have vested so we include these in our diluted EPS calculation for FY25, which increases by 142% to 2.64p.
Valuation
On our revised forecasts and after the share price gained 48% after the announcement, Filtronic is trading on a P/E of 38.6x FY24e and 18.6x FY25e.
Using a reverse discounted cash flow with a WACC of 8%, the current share price is arrived at using revenue growth of 5.9% per annum for FY26–28, growth thereafter of 3% and EBITDA margins growing to 23.7% from the 22.4% forecast in FY27. In our view, the relationship with SpaceX provides potential for higher growth than this, considering the ongoing E-band production orders, existing satellite payload development agreement and the more recent agreement to develop SSPAs at frequencies other than E-band.
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