Firan Technologies Update - $FTG.to

The last time I did a write up on FTG was July last year. Since then shares are up about 90% which is well ahead of the TSX. Shares really took off at the end of April/start of May 2021 on the back of heavy volume. Of course, I don't own shares. However, this is well behind AMC, GameStop and pretty much all crypto (which I also don't own). Rather than mulling over not buying shares a year ago, I'm going to take another look at FTG and walk you through some of what I do when monitoring a company.

Update

Covid was not easy on this business from a operational and a product demand standpoint. The defense portion of the business looks stable as it's supported by government funding and not likely to be cut during a downturn. Commercial aerospace demand was the obvious point of uncertainty. All the large manufacturers have cut production and look to take a few years to return to pre-pandemic levels. On top of this the company had a few covid specific flare-ups at a couple of facilities that led to some production stoppages.

This doesn't sound like a recipe for the shares to nearly double, but the market is forward looking and perhaps this was all factored into the price previously. When things looked the most uncertain was when the risk to the business was at a low. Of course, government support has helped them manage the pandemic.

Outlook

The outlook has moderated as the vaccine rollout looks to be taking hold. Yes there are the variants, but they (so far) have not derailed the hard work of getting needles into arms. Boeing and Airbus are still expecting lower production in 2021 and into 2022. Despite the reopen in the US and Europe, many coutries are still in the middle of their vaccine rollout.

Valuation Looking Ahead

It's easy to look at a price chart seeing FTG double in price and assume that you've missed the move. I know I have a very hard time looking at each business with both eyes open and judging the offer from Mr. Market at that point in time without anchoring to what I could have purchased shares for previously.

Though shares have done well, the company is not expensive on an absolute basis. They never trade at SaaS level multiples, but looking at historical valuations there is still room for some multiple expansion.

I think using previous multiples with some discretion is a reasonable way to judge upside to downside ratio. All this data is available via TIKR.

Downside

For downside, I'm using price to tangible book and enterprise value over est 2022 revenue. This is using 110 mil in rev and about 50 mil in tangible book value. For reference, 2019 revenue was 112 mil and is about 97 mil currently.

FTG doesn't trade much below 0.5-0.6 ev/rev unless we look way back to 2012-2014 when the business wasn't as profitable and had less facilities. I'm going to use 0.5 ev/est. 2022 rev as one downside scenario.

In addition to the ev/rev, I'm going to utilize price to tangible book as the other downside scenario. 2020 was the cheapest the business traded for a long time based on this metric. I'm going to use 1.35x the last stated tangible book value as the other downside scenario.

Upside

For the upside, I'm going to focus on two measures of profitability, EBITDA and FCF. I'll EV/est 2022 EBITDA and price to pre covid FCF to take into consideration the balance sheet (at least to some degree). The reason I'm using 2022 ebitda is I believe that the income statement predictions are a little more thought out by analysts than the cash flow. Using historical data and the forward estimates, I think the use of 14 mil in ebitda is reasonable. For cash flow, I'm using pre-covid numbers of about 9 mil. This doesn't include working capital adjustments. As well, FCF doesn't include the Colonial Circuits acquisition made in 2019.

Though FTG has traded higher than 6x ev/ebitda, it seems to gravitate towards that number over time. I want to be reasonable in my expectations, so I'll use 6x 2022 estimated ebitda.

The FCF numbers don't go back quite as far as the other valuations, but there is still enough data to draw a reasonable conclusion from it. I'm going to use 8x FCF.

Upside:Downside

Given the above we get an upside to downside ratio of 1.5. Not high enough for me to pull the trigger here. I prefer a 3 or 4:1 ratio. Of course, this is just looking at the company right now knowing what we know. The valuations used are historical and the company may trade at a premium to these multiples as the business grows and liquidity increases.

This purely mechanical exercise has the potential to miss so many things. Some that come to mind are:

• The company could use it's cash to purchase another facility at discounted rates.

• The commercial aerospace part of the business could bounce back quicker than anticipated and vaccines rollout.

• The defense business could see more growth than anticipated.

• Variants could turn out to be worse than anticipated and full reopen could be delayed.

• There could be some specific issue with a facility in the business.

• The government support could be removed substantially faster than the business environment normalizes post covid.

Summary

FTG is a company I'll keep a close eye on. From my perspective they have a strong market presence with a management team that understands capital allocation. Though it is somewhat cyclical, the business does generate ROE and ROIC well above it's cost of capital over a full cycle. The balance sheet is strong and their is potential to expand the business in a depressed environment. As well the CEO owns substantially more than his annual salary in shares.

I will continue to monitor FTG.

Anyone own FTG or have any opinions?

Dean

*I don't own FTG at this time