Paradigm Capital says Firan Technology has 48 per cent upside

Firan Technology Group’s (TSX:FTG) quarterly results came in better than expected, says Gabriel Leung, analyst with Beacon Securities, whose client update on Thursday reiterated his “Buy” recommendation with a raised target price of $4.00.

Aerospace and defence electronics supplier Firan Technology reported its Q2 financials on Wednesday, with record sales of $28.9 million, a 13 per cent increase over Q2/17, and featuring a 42 per cent boost in its aerospace segment compared to Q2/17 at $12.7 million.

“The second quarter of 2018 began to demonstrate the earnings benefits from our acquisitions in 2016,” says Brad Bourne, President and CEO, in a statement. “While we continued to experience some increased costs in the quarter related to the transition, we also achieved a dramatic improvement in our net earnings and cash flow.”

The $28.9 million in revenues beat Leung’s estimate of $26.0 million, while FTG’s Q2 EBITDA of $3.5 was better than Leung’s $2.3 million. The analyst noted the company’s free cash flow for the quarter was $3.6 million, with an operating cash flow of $4 million against capital expenditures of $414,000 and deferred development costs of $67,000.

Leung said that he anticipates FTG will get modest cost savings as the transition costs associated with its Chatsworth Aerospace facility are eliminated.

“Bottom-line, we believe fiscal Q2 was an outstanding quarter both in terms of sales, bookings and cost improvements,” says Leung. “With a strong demand backdrop (despite lingering uncertainties from potential trade wars), along with improving operations, we believe FTG’s near-term growth prospects look promising.”

Leung sees FTG generating EBITDA of $10.4 million on revenue of $108.3 million in fiscal 2018. The analyst’s $4.00 target (was $3.00) is based on his 10x FY18e EV/EBITDA valuation and represents a projected return of 48 per cent at the time of publication.