The Investment Column: A lot to trust at Filtronic

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The Independent Online
Filtronic Comtek has only been on the stockmarket since October 1994 but shareholders have had more excitement in that time than most companies provide in a decade or so. Floated at 105p, the shares rose in a more or less straight line to peak at 507p almost a year to the day after first dealings. They closed yesterday at 196p.

Put another way the company's market value has swung from an opening value of just pounds 43m to a peak value of pounds 218m and back down again to pounds 83m yesterday. That sort of roller coaster ride could only be achieved at the high tech end of the electronics industry so it will come as no surprise that Filtronic's products are black boxes in mobile phone base stations that it would take several PhDs to fully understand.

The fact that no investors really understand the product is, of course, the root of the problem with the shares. That and the high expectations which are engendered by a company operating in one of the truly great growth markets of the back end of the century - mobile telephony.

It is estimated that there will be more than 400 million mobile subscribers by the year 2001 compared with 87 million at the end of last year. With Filtronic claiming to have little competition in Europe for its transmission and receiver devices, that is plainly a mouthwatering prospect for a small company.

The problem is that translating the company's technical expertise into sales and profits is proving slower than first hoped for. And because Filtronic prudently writes off its research and development expenditure as it goes along, profits can be extremely volatile. Last year, reported pre-tax profits of pounds 3.25m (pounds 3.28m) were struck after writing off slightly more than that in R&D.

That would not have hit the bottom line so hard if big customers had not deferred orders in the US, effectively putting back the roll-out of Filtronic's American business by almost a year. While the company says it is only a temporary blip, the market is rightly loathe to attach a premium rating to a company that has disappointed so soon into its quoted life.

Even on the basis of house broker Panmure Gordon's forecast of pounds 5m profits in the year to next May and pounds 9.8m next time, the shares, down a further 31p yesterday, trade on a prospective price/earnings ratio of 25, falling to 12.5. With no yield support, even after a 61 per cent fall from the peak, there's still a lot taken on trust.

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