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.

Revenue Mix

Business                                                            Geography

                                                                                 

 

Investment Rationale

• Technical Strength: Shares of FTG 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, and 100-day SMAs. This implies a bullish price trend in the stock. 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 the 9-day SMA signal line, another bullish indicator.

      

      Technical Price Chart. Source: Refinitiv (Thomson Reuters)

• Robust Free Cash Flow: The company has reported significant improvement in free cash flow on a sequential quarter basis. In the third quarter of FY20, FTG’s free cash flow has bolstered by 33% to CAD 8.32 million vs CAD 25 million a quarter before. Free cash flow is Increasing free cash flow is a sign of healthy financial positions of the company that is thriving in the current environment. Further, higher free cash flow indicates that a company has the cash to expand, develop new products, buy back stock, pay dividends, or reduce its debt.

Source: Refinitiv (Thomson Reuters)

• Ample Liquidity: The company stated that it has adequate liquidity position to easily pass through the tough time led by COVID-19 distortions. As at August 28, 2020, the Corporation’s primary sources of liquidity totaled CAD 55.298 million (CAD 51,154 as at November 30, 2019), made up of cash, accounts receivable, contract assets, income taxes receivable and inventory. Working capital at August 28, 2020 was CAD 37.093 million as compared to CAD 28.603 million at November 30, 2019. Further, the company generated CAD 3.2 million in cash in Q3 and ended the quarter with CAD 8.8 million in net cash on the balance sheet. 

• Manageable Debt: FTG’s total debt to equity ratio stood at 11.6%, with TTM Interest Coverage ratio stood at 38.15 times, which implies virtually no balance sheet risk for the company. Also, the company has brought down its bank debt in Q3FY20. In the third quarter of fiscal 2020, interest costs were CAD 61 thousand, a decrease of CAD 8 thousand or 11.6% as compared to CAD 69 thousand for the same period last year. The decrease in interest expense in the third quarter and on a year-to-date basis in fiscal 2020 was mainly due to the decrease in bank debt as compared to same periods last year.

• Vaccine Rollout and Gradual Recovery in International Travel: The world economy and the outlook for the commercial Aerospace industry is very uncertain currently. 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 is likely to support demand dynamics for the group. Also, since the announcement made by Pfizer and Moderna that they have vaccine with more than 90% efficacy, the group’s share moving up as investors are under the impression that vaccine rollout would bring thing to normal soon. 

• Risk Associated to Investment: A Further breakout of virus outbreak and international travel restriction may weigh on the group’s performance. Also, the Corporation is exposed to foreign exchange fluctuations as the vast majority of sales are earned in U.S. dollars, while a significant amount of operating expenses are incurred in Canadian dollars.

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, because 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 because of lower demand for commercial aircraft components. 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 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 and the COVID-19 related impacts in components supply and the company’s operations at all Aerospace sites, experienced primarily in Q2 2020. 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 was CAD 3.3 million compared to CAD 4.3 million in Q3 2019.
• Net profit after tax at FTG 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 were 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 is 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 was CAD 37.1 million, compared to CAD 28.6 million at year-end in 2019. The increase is 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 50.85% of the total shareholding. Oakwest Corporation, Ltd.  is the entity holding maximum shares in the company at 19.64%, and Polar Asset Management Partners Inc. is the second-largest shareholder, with a holding of 11.98%. The institutional ownership in the company stood at 18.89% and strategic ownership stood at 32.16%.

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: The year just gone by was the worst year for airline and airline ancillary companies. Companies witnessed severe hit on their operation led by travel restrictions imposed across the world.  However, vaccine rollout news has really pushed aerospace and airline 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, airline stocks recorded some positive movement on the stock exchange. 

Moreover, going forward, FTG remains well-positioned as an aerospace and defence electronics company. FTG is now engaged with most of the top aerospace and defence prime contractors in North America and is making significant progress penetrating markets beyond this continent. FTG’s focus on this market is based on a belief that it can provide a unique solution to its customers and attain a sustainable competitive advantage.

Also, the company has ample liquidity to pass through this challenging business environment and manageable debt outstanding, which implies no balance sheet risk for the company.

Further, shares of FTG were in an uptrend with hovering in a bullish trend, with price closed above the crucial short-term as well as long-term support levels 50-day, and 100-day, implies a bullish price trend in the stock.

However, the next wave of a virus outbreak and international travel restriction may weigh on the group’s performance.

Therefore, based on the above rationale, considering the risk associated to investment and valuation, we have given a “Speculative Buy” recommendation on the stock at the closing price of CAD 2.03 on January 12, 2021.

Daily technical chart. Source: Refinitiv (Thomson Reuters)

*Recommendation is valid at January 13, 2021 price as well.

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