This company's valuation doesn't reflect its true worth and potential.
A share with massive amounts of cash in relation to its market valuation, other assets to boot, and growing in an expanding sector has to be worthy of consideration.
Filtronic (LSE: FTC) is such a share. It also has an excellent track record in tipping its buckets of cash back in the direction of its shareholders from time to time, which is always nice.
So what's the downside? Well Filtronic is a bit of a perma-value share that doesn't really get motoring. When I last wrote about the company, the shares stood at 26.25p, and this was much closer to early March's depths of despair for investors. So at 31.5p today (with a 1p dividend in the bag), we've seen a decent return, but nothing to write home about compared with many other small cap shares.
Potential takeover target?
For me, this is part of the appeal in that at the current price it hasn't really "happened" yet. Perhaps it never will. But the company would certainly make a tasty takeover prospect and given its institutional ownership profile -- funds are the only shareholders with declarable interests with Aberforth Smaller Companies Trust (LSE: ASL) owning almost a quarter -- it wouldn't take much for a predator to agree a fair price. In fact, it came close to getting taken out just over a year ago.
And with a market capitalisation of just £23.4m, it certainly wouldn't be too much of a mouthful for a bigger fish, looking to pick up an attractive business on the cheap, whose assets include state-of-the-art manufacturing facilities in Newton Aycliffe and in Shipley -- as well as the small matter of £16.3m in cash...
With Filtronic's final results for the year to the end of May, though, we learned that trading was tough for the wireless communication equipment maker. On the upside, the company reintroduced its final dividend after gains from the disposal of its UK defence business and its Australian wireless infrastructure business. But it also said the outlook for the point-to-point communication systems (which now comprises all the firm's business) remains "subdued".
On sales of £28.8m, pre-exceptional operating profits came in over £2m, whilst the overall net asset value (all tangible assets) was over £21.5m.
But this should turn out to be a temporary hiatus caused by the global recession. The point to point business has been growing quickly, almost doubling sales between 2007 and 2008, and the company invests heavily in technology. Its customers supply wireless products worldwide, and the impression one gets is of a technically proficient company carefully balancing spending on R & D with bottom line performance. Last year, it spent £1.8m (6.4% of revenue) on R & D in the continuing area of its business.
This should benefit Filtronic as and when market conditions improve. But it isn't happening yet. The interim management statement in September told is that trading in the first quarter has continued at a similar level to the second half of last year with performance above break-even and cash neutrality.
This wasn't bad, but nor was it anything to get tremendously excited about. The directors are a fairly taciturn "feet on the ground" lot, though this may change under the new Chairman. Either way, I think we could see a gradual improvement from here as the market picks up and the R&D investment bears fruit.
Who really knows? But the real beauty of such situations is that you can dig down for value with a reasonable degree of confidence if the share price retreats further. Such investments are never without risk, as the small print always tells us, but cash, assets, the potential for improved trading performance and management's track record of good sense gives one far greater confidence than with many other small caps.
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David owns shares in Filtronic.