Firan Technology has price target cut at Beacon Securities

Fourth quarter results from Firan Technology (Firan Technology Stock Quote, Chart, News TSX:FTG) arrived as expected, according to Beacon Securities analyst Gabriel Leung, who in a client update on Tuesday maintained his “Buy” rating for the stock but dropped his target from $7.50 to $6.50.

Toronto-based Firan, which supplies electronics and subsystems to the aerospace and defence industries, announced its fiscal fourth quarter and full year 2019 results on February 13, showing quarterly revenue of $27.1 million versus $28.0 million a year earlier and EBITDA of $2.9 million. Firan finished up the year with $112.7 million in revenue, an increase of $8.2 million after excluding a $5-million revenue adjustment, and EBITDA of $14.6 million, up from $10.5 million for 2018.

Firan's Q4 was impacted by a ransomware cyberattack that occurred over the previous quarter which, while not affecting the company’s orders —nor did the company pay the ransom— nonetheless had an effect on production and sales.

“In September 2019, FTG was the subject of a cyber-attack which impacted FTG’s systems across North America,” said Firan management in their quarterly press release. “Overall lost production was approximately ten per cent of normal quarterly sales. Also in Q4 2019 compared to Q4 2018, shipments of products for the simulator market were down temporarily by approximately $3 million as previous orders were completed and new orders could not be assembled until the arrival of longer lead components. Simulator related revenues are expected to rebound in the second half of 2020.”

Firan has two operating segments, FTG Aerospace and FTG Circuits. For the former, the fourth quarter saw sales drop to $8.4 million versus $10.7 million a year earlier. Management said the decline was due partly to the cyber-attack and to the drop in simulator activity, which itself was the result existing orders coming to completion and a gap in shipments.

For Circuits, Firan hit revenue of $18.6 million, up from $17.4 million a year earlier, with revenue here also impacted by the cyberattack. Gross margins were down to 21.7 per cent from 25.9 per cent a year earlier, with lost productivity from the cyberattack being a major factor.

In his report, Leung said that fallout from another event, the Coronavirus, could impact Firan over the near term due to lost production days in China.

“The company is forecasting about ten lost production days, although we believe it could be more,” wrote Leung. “We would note that only ~$5 million in annualized revenues are derived from FTG’s China facilities. Furthermore, as noted above, simulator sales could remain low over the near-term, but rebound in H2 FY20.”

“Despite some near-term hiccups, we believe FTG remains in good position given its $50-million backlog and net cash positive balance sheet, which could be used for additional acquisitions,” Leung said.

The analyst thinks Firan will generate fiscal 2020 revenue and EBITDA of $118.7 million and $17.2 million, respectively. His $6.50 target is based on a 9x multiple of his fiscal 2020 EV/EBITDA estimates and at press time represented a projected 12-month return of 80 per cent.