Firan Technology Group Corp (TSX: FTG) is a supplier of aerospace and defense electronic products and subsystems. The company has two operating segments namely FTG Circuits and FTG Aerospace. FTG Circuits manufactures printed circuit boards within the global marketplace. FTG Aerospace designs and manufactures illuminated cockpit panels, keyboards, bezels, subassemblies, and assemblies for original equipment manufacturers of avionics products and for airframe manufacturers. The company operates in Canada, the United States, Asia, and Europe and generates major sales from the United States.

Investment Rationale

• Insiders are increasing the stake: Insiders have bought shares of FTG for the eight times over the past one year. Moreover, all the buying has taken place post COVID-19 free fall in the broader market. This implies that the insiders are quite bullish on the future performance of the company. Also, it depicts that insiders have used discounted price as an opportunity to accumulate more shares. Over the last year, we can see that the biggest insider purchase was by President Bradley Bourne for CAD 67k worth of shares, at about CAD 1.92 per share. So, it's clear an insider wanted to buy, at around the current price, which is CAD 2.07. Further, insiders buying amid challenging times, especially in case of penny-cap stocks provide a safety cushion to the retail investors, and also builds a lot of confidence in the existing as well as potential shareholders.

Insiders Activity Over the Past 1-Year. Source: Refinitiv (Thomson Reuters)

• Stock hovering in a bullish price zone: Shares of FTG are hovering in a bullish zone, with price closed above the immediate, short-term as well as long-term support levels of 5-day, 10-day, 20-day, 30-day, 50-day, 100-day and 200-day SMAs, which implies a bullish price trend in the stock. Moreover, its shares have registered a breakout on the daily price chart recently, as stock crossover its crucial long-term resistance of 200-day SMA. Further, the Moving Average Convergence Divergence (MACD) is rising, with the difference between 12-day and 26-day EMAs is positive, and MACD oscillator hovering above its 9-day SMA signal line, another bullish indicator.

Technical Price Chart. Source: Refinitiv (Thomson Reuters)

• Volume Spurt: A volume spurt was spotted on the daily price chart of FTG, with 5-day average volume traded significantly above the 30-day average volume traded. The 5-day average traded volume was approximately 121% higher against the 30-day Average Volume Traded in the counter.

Volume Chart. Source: Refinitiv (Thomson Reuters)

• Solid Relative Strength: FTG shares have recorded solid relative performance over the past 3-Month, 1-Month and 5-day trading session. The stock was up approximately 25% in the past 3-month trading session, approximately 3% in the last 1-month and 14% in the past 5-day trading sessions. Further, the stock has outperformed the benchmark index by 18%, 20.3% and 14% at the same time. This implies a strong relative strength in the FTG counter on the stocks exchange.

• COVID-19 vaccine rollout is likely to support FTG performance: The world economy and the outlook for the commercial Aerospace industry is very uncertain at this time. By far, the largest negative impact is the spread of COVID-19 around the world. This has resulted in an almost complete halt to air travel and has hurt the overall world economy. However, gradual recovery in the tour and travel industry and rollout of COVID-19 vaccine would support the demand dynamics for the group. Also, since the announcement made by Pfizer and Moderna that they have vaccine with more than 90% efficacy, its shares are moving up as investors are under the impression that vaccine rollout will bring the thing to normal soon. 

• Adequate Liquidity: The company’s current ratio at the end of the third quarter stood at 2.81x, which implies sufficient liquidity to cover the short-term obligations. Further, the group generated CAD 3.2M in cash in the third quarter and ended the quarter with CAD 8.8M in net cash on the balance sheet. Also, at the end of the third quarter, the corporation’s net working capital was CAD 37.1M, compared to CAD 28.6M at year-end in 2019. The increase is due to higher cash, higher inventories, lower accounts payable offset by lower accounts receivable. 

• Risk Associated to Investment: Top five customers accounted for more than 60% of the group’s total revenue, which reflects the concentration risk. Further, the relative strength, or weakness, of the Canadian dollar, could also be a factor as about 50-60% of FTG’s operations are in Canada but FTG competes primarily in U.S. dollars. Strengthening of the Canadian dollar would hurt FTG’s competitiveness, whereas a weakening of the Canadian dollar would enhance FTG’s competitiveness.

Financial Highlights: Q3FY20

Source: Company Filing

• Sales for the third quarter of fiscal 2020 were CAD 24.364 million, a decrease of CAD 3.589 million or 12.8% from the third quarter of fiscal 2019. The significant variance in third quarter sales in 2020 as compared to 2019 were as follows:

• All FTG sites were negatively impacted by COVID-19, particularly as the reduction in production rates for commercial aircraft resulted in reduced demand for FTG’s products. The negative revenue impact for Q3 2020 related to commercial aerospace is approximately CAD 3.0 million and is most heavily concentrated in Circuits Toronto and both China sites.
• Shipments into the Simulator market were approximately CAD 2.4 million in Q3 2020 as compared to CAD 3.4 million in the prior year, as a result of the timing of orders and the component lead times. As of the close of Q3 2020, the backlog of Simulator products is approximately CAD 8.0 million, of which a significant portion is expected to be delivered in the final quarter of 2020.
• Partially offsetting the foregoing items, the Circuits Fredericksburg operation, acquired in July 2019 and included in the FTG Circuits business segment, contributed approximately CAD 1.6 million of sales as compared to CAD 1.2 million in the prior year quarter.

• Net sales in the Circuits segment for the third quarter of fiscal 2020 decreased by CAD 2.646 million or 14.4% mainly as a result of lower demand for commercial aircraft components, partially offset by the Circuits Fredericksburg acquisition which contributed approximately CAD 1.60 million in sales as compared to CAD 1.20 million in the previous period. Net sales to the top five customers represented 63.9% of the FTG Circuits net segment sales for the third quarter of fiscal 2020 (67.0% in 2019)
• Net sales in the Circuits segment on a year to date basis in fiscal 2020 decreased by CAD 1.058 million or 2.0%, mainly as a result of lower demand for commercial aircraft components, partially offset by the Circuits Fredericksburg acquisition which contributed CAD 6.300 million in sales as compared to CAD 1.200 million in the previous period. Net sales to the top five customers represented 62.4% of the FTG Circuits net segment sales on a year to date basis in fiscal 2020 (69.1% in 2019).

Source: Refinitiv (Thomson Reuters)

• The decrease in Aerospace segment net sales for the third quarter of fiscal 2020 of CAD 0.943 million or 9.8% is the result of CAD 1.0 million reduced sales in the Simulator market. Net sales to the top five customers represented 63.6% of the FTG Aerospace net segment sales for the third quarter of fiscal 2020 (59.3% in 2019). The decrease in Aerospace segment net sales on a year to date basis in fiscal 2020 of CAD 8.796 million or 26.8% is the result of CAD 6.0 million of reduced sales in the Simulator market. Net sales to the top five customers represented 57.1% of the FTG Aerospace net segment sales on a year to date basis in fiscal 2020 (54.6% in 2019).
• Gross margins in Q3 2020 were CAD 6.7 million or 27.6% compared to CAD 7.9 million or 28.3% in Q3 2019. The lower sales impacted the overall margin while strong cost control and the Canadian wage subsidy partially offset this drop.
• Earnings before interest, tax, depreciation, and amortization (EBITDA) for FTG for Q3 2020 were CAD 3.3 million compared to CAD 4.3 million in Q3 2019.
• Net profit after tax in Q3 2020 was CAD 0.6 million or CAD 0.03 per diluted share compared to a net profit of CAD 1.8 million or CAD 0.07 per diluted share in Q3 2019. Net profit after tax in Q3 2020 was impacted by the lower sales, offset by strong cost controls and the Canadian wage subsidy.
• The Circuits Segment net earnings before corporate and interest and other costs were CAD 1.2 million in Q3 2020 compared to CAD 3.3 million in Q3 2019. The lower sales was the most significant impact on the segment profitability. 
• The Aerospace net earnings before corporate and interest and other costs in the quarter were CAD 1.2 million in Q3 2020 versus CAD 0.1 million in Q3 2019. The improvement was primarily due to improved performance at the Chatsworth facility, offset by the impact of lower sales.
• As of August 28, 2020, the Corporation’s net working capital were CAD 37.1 million, compared to CAD 28.6 million at year-end in 2019. The increase was due to higher cash, higher inventories, lower accounts payable offset by lower accounts receivable.
• The group ended Q3 2020 with over CAD 47 million in total backlog, of which CAD 26 million is due in Q4 2020

Top-10 Shareholders

The top 10 shareholders have been highlighted in the table, which together forms around 51.9% of the total shareholding. Oakwest Corporation, Ltd. and Polar Asset Management Partners Inc. holds the maximum interests in the company at 19.44% and 13.04%, respectively. The institutional ownership in the FTG stood at 4.6%, and ownership of the strategic entities stood at 7.3%.

Source: Refinitiv (Thomson Reuters) 

Valuation Methodology (Illustrative): EV to Sales based Valuation Metrics

*Note: All forecasted figures have been taken from Refinitiv (Thomson Reuters)

Peer Comparison

Source: Refinitiv (Thomson Reuters)

Stocks Recommendation

On a global scale, the airline industry is dramatically weakened with huge drops in passenger travel. Both the demand for and the capacity to finance new aircraft in the short term is expected to be reduced. However, vaccine rollout news has really pushed aerospace and ancillary stock higher on the Toronto Stock Exchange. Since the announcement made by Pfizer and Moderna that they have vaccine ready with more than 90% efficacy, FTG shares are moving higher as investors are under the impression that vaccine rollout will bring normalcy.  Also, the defense market is not expected to be significantly impacted by the COVID-19 pandemic. In fact, defense spending is one tool governments can use to stimulate the global economy.

Moreover, shares of FTG are hovering in a bullish zone, with price closed above the immediate, short-term as well as long-term support levels of 5-day, 10-day, 20-day, 30-day, 50-day, 100-day and 200-day SMAs, which implies a bullish price trend in the stock.

Therefore, based on the above rationale, considering the risk associated with investment and valuation, we have given a “Speculative Buy” recommendation at the closing price of CAD 2.07 on December 01, 2020.

One year daily chart. Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at December 2, 2020 price as well.

Disclaimer

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