FIRAN TECHNOLOGY GROUP CORPORAT (OTC:FTGFF)

Firan Technology Group (OOTC:FTGFF) (FTG.TO) ($4.16; $99.8M market cap)

Reported Q1 2024 results:

• Sales of $35.0 million vs $24.6 million

• EPS of $0.04 vs $0.04

• The six-week strike at Aerospace Toronto had an estimated negative impact on Q1 2024 net earnings of $1M or $0.04 per share. (we also believe the quarter was impacted by higher expenses related to the strike settlement which resulted in higher salaries for union workers).

“During Q1 2024, the Corporation has continued to invest in technology in existing sites, grow the business organically, and integrate the two acquisitions completed last year. FTG is strategically deploying its capital in ways that will drive increased shareholder returns for the future in both the near term and long term.” 

In early March, on the heels of a bullish call with management we added FTGFF to our select long model portfolio. We also have published a Cliff Note from MS Microcaps.

Themes:

BigCapMicrocap  -  GARP - InfoArb - Long-Term Industry Growth Trends

Data

• Founded: 1983
• Exchange: Toronto
• Price: CAD$4.74
• Shares Outstanding: 23.8M
• Market Cap :  CAD$113M
• TTM Revenue: CAD$135M
• LT Debt: CAD$9M
• Current Portion of LT Deb t:  CAD$1.2M
• Cash: CAD$6.6M
• P/E trailing 12 months: 16.3x 
• P/E 2024 est: 14.4x
• EV/S trailing 12 months:   0.86x
• EV/S on 2024 revenue est:   0.79x

Revenue History

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EPS History

What they do :

Printed circuit boards and equipment for cockpits

• Product Sales Breakdown : 70%  Circuit Boards; 30% Aerospace Equipment 
• Industries served : Aerospace (both commercial and defense),  Defense

In the company’s words:

FTG Aerospace designs and manufactures illuminated cockpit panels, keyboards, bezels, sub-assemblies and assemblies for original equipment manufacturers (“OEMs”) of avionics products as well as for airframe manufacturers.

FTG Circuits is a leading manufacturer of high technology/high reliability printed circuit boards within the global marketplace. 

Circuit boards house different electronic components. These boards can be shipped directly to an OEM that will install electronic components or to companies that actually build out the boards. These companies are called electronic manufacturing service companies.

Important Acquisitions in 2023 in the circuits segment:

• *Circuits Minnetonka - $30M in revenue. 
• *Haverhill: $3M to $4M in revenue 

More on Reasons to add to the Index, Content Supporting the Overarching Themes, Valuation, and Research Tasks…

Some History: 

At one point, Firan was a left for dead smaller division of another company, The current CEO, Brad Bourne, joined the company to turn that division around. Apparently, he had some experience with turnarounds. The parent company decided to cut ties with Firan, at which time the company executed a reverse merger with a company in the same industry. We believe this all occurred in the early 2000s.

Until recently, revenue growth has been stagnant, but it seems the company’s focus on new market segments and new product rollouts could lead to some predictable growth over the next few years.

Reasons to add to the Index: 

1. High visibility into the sales pipeline for several years to come. Some of the company's major customers are significantly increasing their airplane production plans. For example, Airbus is expected to increase its annual production rate by 100% over the next few years (1000 per year), and Boeing is expected to increase its production rate by about 40% (700 per year). The backlog of orders for both of these companies will take over 10 years to satisfy. Bell Helicopter reported a 31% revenue growth in 2023 and is projecting nearly 10% growth for 2024.
2. The company should start to experience some operating leverage since it spent the last year increasing staffing to get to the point where it will be able to handle the higher level of demand it is experiencing.  Part of the company's margin expansion will come from the aerospace division offering higher margin products within the cockpit. For several years, the company was focusing on lower-margin areas of the cockpit. Moving up the value chain will translate into selling products for thousands of dollars vs. hundreds of dollars.
3. The company has a goal of growing 15% a year and basically doubling its size every five years. Given the company's operating leverage, EPS should grow faster. Supported by the company's customer growth outlook, we don’t think this goal is too aggressive. 
4. Analyst estimates are showing minimal growth in 2024. However, we think an upside exists to those estimates due to the positive outlook of FTG’s customers, and, more importantly, we don’t think analysts are baking in any growth from the 2023 acquisitions. For example, Circuits Minnetonka was generating sales of about $40 million pre-COVID and is currently running at about $30 million. The fact that Minnetonka showed a sequential increase in revenue of 12% from Q3 to Q4 gives us some confidence that revenue will continue to grow. Part of the revenue growth will come from price increases that management believes should’ve occurred before the acquisition.
5. The company plans to reduce annual expenses by $1.0 million a year. This is important because a new agreement with their labor union will increase annual wages by $1.5 million.
6. The company is experiencing an elevated level of revenues from cross-selling customers between the two business segments.
7. The acquisition of Circuits Minnetonka is expected to give the company more exposure to the U.S. market.
8. From a conversation we had with the CEO, we like that management is focused on staying in its lane in that it doesn’t really want to stray from its expertise in serving the aerospace market.
9. FTG is dealing with most of the top aerospace and defense prime contractors in North America and claims it’s a top 5 player in its market.

Valuation

Shares are trading at a P/E of 14.7x on 2024 EPS estimates of $0.34 (8% revenue growth). We would normally view this to be fair in the near term. However, conservative analysts estimate that there is room for upside. Overall, it can be challenging to value a company like Firan. P/Es can be as low as 5x to 10x or over 25x.

We are betting that shares will eventually trade in excess of 25x, given the company’s leading industry position and good chance that it is entering a new, predictable growth cycle phase. That would translate into a 12-month price target of $8.50 (CAD), or 70% upside.

Taking a look at a U.S. comp, ISSC, we noticed that shares are selling at a price to sales and enterprise value to sales of about 4x vs. FTGFF EV/S of around 0.8x.

Caveats : 

1. The company's simulator business, part of the aerospace division, can be lumpy.
2. Even though the company resolved its union dispute, annual expenses will rise $1.5 million. Also, first-quarter revenues will come in $3 to $4 million lighter than expected due to the short-term strike. However, revenue will be pushed out into the second quarter.
3. China manufacturing facility. 
4. We don’t love this Q4 conference call comment: “As always, there are possible downsides or headwinds that could impact our future performance.”

Research Tasks 

1. Given that the aerospace segment experienced significant growth in 2023, is that where you see most of your opportunity to grow the company, especially since it's only 30% of revenue?
2. Does the company anticipate making more acquisitions in 2024? 
3. Is it possible for Circuits Minnetonka revenue to get back to $40M in revenue in 2024?
4. The circuit business seems to be a commodity business. Explain why you think you have a competitive advantage in this business.
5. What top-end revenue can current facilities support?
6. Regarding the Haverhill acquisition, what’s the plan to expand the revenue outside its $3M to 4M historical run rate? What are the reasons why Haverhill has not been able to grow?
7. Prior to the pandemic, was Circuits Minnetonka growing revenue?
8. How much of the company’s aerospace revenue comes from the lumpy simulator business?
9. Given the positive outlook from the company's customers, it’s a little perplexing that the company hasn’t placed aggressive growth assumptions for 2024 outside the extra revenues from the acquisitions. We’d like to understand why.
10. Does the company only make circuit boards, or does it also install components as a one-stop shop?

PR/CC/Filings/Presentations Commentary

Q4 2023 Conference Call:  

Our end market demand remains strong. Air travel continues to rebound. Airbus delivered about 650 aircraft in 2023. But more importantly, they're looking to ramp to almost 1,000 aircraft annually in the next few years, and this is a 50% production rate increase. Airbus has a backlog of over 8,000 orders, which is over a decade worth of production at current production rates. At Boeing, they shipped just under 500 planes in 2023 and have plans to ramp their production by about 40% to almost 700 planes in the next few years. Boeing's backlog is almost 6,000 planes, so also over a decade worth of orders at current production rates. But the FAA has told Boeing to halt their production rate increases, while they ensure there is sufficient focus on quality. But overall, it is clear why both companies are looking to ramp their production. In the business jet market, Bombardier is expected to report low-single-digit or low-double-digit shipments, production rate increases for 2023 when they report their result, which they did this morning. 

Also interesting to note, of the top 10 customers, 6 are customers shared between Circuits and Aerospace. We particularly like to see the shared customers as it means we are maximizing our penetration in these customers by selling both cockpit products and circuit boards. 

We are expecting to grow in 2024. The easiest aspect of our growth will be having the acquisitions for the full 12 months, that is compared to seven months in 2023. This should add an estimated CAD 12 million on sales for 2024. If we can ramp production and sales at the newly acquired sites, this would further add to the growth.

Company Goals: With each success, we could not help but move our goalposts. The following are some items on our wish list: 15% annual compounded growth; Double our growth every five years through organic growth and acquisition; Debt to EBITDA ratio below 1:1. Indeed, those are lofty goals. But we have no doubts we could achieve it by sticking to our philosophy of delivering and utilizing operational excellence at the core of our strategy.

Reference Links:

• Q4 CC:
• Company Goals 
• Q4 SEDAR Management & Discussion:

Firan Technology Group Corporat (OOTC:FTGFF) (FTG.TO) ($2.42; $57.8M market cap)

Reported Q4 and full year results:

• Q4 2023 sales of $39.9 million vs $23.7 million

• Q4 EPS of $0.10 vs $0.05

• Full year sales of $135.2 million vs $89.6 million

• Full year adjusted EPS of $0.29 vs $0.04

During 2023, the Corporation has invested in technology in existing sites, grown the business organically, and completed two acquisitions. FTG is strategically deploying its capital in ways that will drive increased shareholder returns for the future in both the near term and long term.