By anyone’s standards, the mobile broadband market is going like a train. At the end of 2010, there were more than 500 million wireless broadband users globally. South Korea leads the pack with penetration rates of 90%, followed by Finland at 85%, Sweden at 83% and Norway with 80%. Britain lags behind with a paltry 17% take up.
Inexpensive, flat-rate data tariffs have been instrumental in fuelling adoption, along with the immense popularity of smartphones and tablet computers. There’s also been a recognition that internet services are not discretionary purchases for many people. That’s why, despite the recent economic soft-patch, research house Ovum expects that the size of the market for worldwide mobile broadband will more than double from $100bn in 2010 to $223bn by 2015, when there will be around three billion users.
One firm set to benefit is Filtronic, which supplies proprietary electronic components, used to increase the capacity of mobile base stations. That said, the share price has been as sick as the proverbial parrot. This year the company has been plagued by deferred orders and lost volume at its largest customer Nera, which was bought in January by rival Ceragon. But it’s not all bad news. The company has a long-term contract with Selex Galileo to supply components for aircraft radar. Deliveries have begun, and are set to ramp up in the second half of this year.
Filtronic (LSE: FTC)
Elsewhere, initial orders for its gigabit radio modules have been secured, and semiconductor volumes are ticking along with significant uptake expected in 2012. The firm is also well positioned to participate in the US 4G market, where it has been selected by Alcatel-Lucent as a supplier for both AT&T and Sprint.
Filtronic has an estimated £3m in net cash, with sales projected to jump from £16m for the year ending May, to £25m 12 months later. Although it is loss-making, I would expect the group to move back into the black in 2013 and thereafter achieve EBITA margins of 10%. On this basis I value the stock on one times revenues, which, adjusting for the cash, delivers an intrinsic worth of about 30p a share. As for the risks, chief executive Hemant Mardia has warned that economic conditions are challenging, and a large proportion of the turnover is still concentrated in the hands of a few customers. There are also the usual considerations of foreign-exchange fluctuations and being a small company in a global industry.
Even so, with the pressure on for wireless operators to release capital expenditure to cope with explosive demand for mobile data, then conditions should soon improve. Preliminary results are due out in late July, with house broker Panmure Gordon chalking up a target price of 32p.
Recommendation: BUY at 22p (market cap £21m)