buy $4.00 initiating coverage - beacon securities · 38,050 new commercial aircraft are expected to...

Beacon Securities Ltd.| 66 Wellington Street West, Suite 4050, Toronto, Ontario, M5K 1H1 |416.643.3830|www.beaconsecurities.ca

Firan Technology Group Corp. (FTG–T)

August 4, 2016

Ready For Operating Leverage To Takeoff

Company Profile

Toronto-based Firan Technology Group (“FTG”) is a leading global

supplier of aerospace and defence electronic products and

subsystems, with two main operating segments: FTG Aerospace

(~35% of revenues) and FTG Circuits (~65% of revenues)

Investment Thesis

In our opinion, FTG has experienced a resurgence in top-line growth

and profitability thanks to market share gains, an expanding breadth

of products and the improvement in the overall global aerospace

and defence industry. We believe this growth is poised to accelerate

thanks to recent acquisitions, which, over the next few quarters,

could help to improve the company’s internal utilization rates and

drive a concurrent improvement in operating margins.

Investment Highlights

- In our opinion, the macro environment remains very favorable for

FTG. Order backlog at Boeing and Airbus remained at record

levels for both companies through 2015. Between 2015 – 2034,

38,050 new commercial aircraft are expected to be delivered to

the global market. Meanwhile, global defence spending is

expected to return to growth in 2016 fueled by increases in the US

defense budget, a resurgence of global security threats and

growth in defense budgets of key nations around the world.

- We believe recent contract renewals, along with continued

market share gains, should enable FTG to maintain at least low-

single digit organic growth profile within its Circuits business. Within

Aerospace, we believe growth will be driven by market share

gains (new customers/design ins), along with the capture of new

scope across existing programs/customers. We are modeling 5 -

8% organic growth within Aerospace for our forecast period.

- In our opinion, the most exciting financial aspect of the FTG story

is the potential operating leverage. Prior to its two recent

acquisitions of Photo Etch and Teledyne Printed Circuit

Technology, we believe the company’s Aerospace utilization

rates were running between 20 – 50% (between 3 facilities). Once

these assets are integrated and their manufacturing is moved to

FTG’s own facilities, we believe there could be a significant

improvement in margins. We are modeling EBITDA margins to

improve from 6.9% in FY15 to 13.1% in FY18.

- With FTG trading at 6.8x FY+1 EV/EBITDA versus peers at ~8x, we

view FTG as a good risk-return investment opportunity. On FY18e

EBITDA, which we feel is a better representation of the full benefit

of FTG’s two recent acquisitions, the stock is trading at 5.4x. We

are initiating coverage with a Buy rating and $4.00 target, which

is based on 8x FY18e EV/EBITDA.

$2.43

$4.00

65%

YE: Nov FY16E FY17E FY18E

Revenue (M) 83.9 97.0 102.2

EBITDA (M) 6.9 10.4 13.4

GAAP EPS ($) 0.17 0.23 0.32

FY16E FY17E FY18E

EV/Sales 0.8x 0.7x 0.7x

EV/EBITDA 10.4x 6.8x 5.3x

P/E 14.3x 10.6x 7.6x

22.1

Shares O/S (FD)1 24.2

Market Cap (Basic) $53.7

Market Cap (FD) $58.8

Pro-forma Cash $2.8 $0.12/sh

Pro-forma Debt $15.0 $0.62/sh

EV $71.0

[email protected]

Initiating Coverage

Previous Close

12-month Target Price

Potential Return

Estimates (C$)

Valuation

Company Description

Toronto-based Firan Technology Group is a leading global supplier

of aerospace and defence electronic products and subsystems

and has two main operating segments: FTG Aerospace (~35% of

revenues) and FTG Circuits (~65% of revenues)

Research Team

Buy $4.00

Stock Performance (1 year)

Stock Data (M)

Shares O/S (Basic)

Gabriel Leung 416-507-3963

Who They Are and What Do They Do?

• Toronto-based Firan Technology Group (“FTG”) is the result of the amalgamation between Circuit WorldCorporation and Firan Technology Group Inc. on August 30, 2003.

• The company is a leading global supplier of aerospace and defence electronic products andsubsystems.

• The company has two main operating segments: FTG Aerospace (~35% of revenues, post acquisitions)and FTG Circuits (~65% of revenues).

• FTG operates 6 facilities (and two temporary facilities) from Canada, the US and Tianjin, China, and has~419 full time employees of which 146 are employed in the Aerospace segment , 255 in the Circuitssegment and 18 in the Corporate segment. The company has ~180 unionized employees, all of whichare within the FTG Circuits - Toronto and FTG Aerospace – Toronto facilities. Two recent acquisitions areexpected to add net 40 employees.

• The company’s customers consist of large, multinational OEMs in the aviation, defence, and other hightechnology industries. Key customers include Honeywell Aerospace, Rockwell Collins, Bombardier,SAVIC, GE Aviation, GE Transport, CAE, Celestica, Jabil, and Hamilton Sundstrand.

• Last quarter, the company had two customers representing more than 10% of revenues (i.e. 20.6% and9.4%). Its top 5 customers generated 50.5% of revenues.

1Gabriel Leung, 416-507-3963

Investment Thesis

• In our opinion, FTG has experienced a resurgence in top line growth and profitability thanks to

market share gains, an expanding breadth of products and the improvement in the overall global

aerospace and defense industry, most notably within the commercial aerospace sector.

• We believe the company is poised to experience strong operating leverage as excess capacity

within its Aerospace facilities is absorbed by organic and M&A-related revenue sources.

• We also believe top line growth and profitability could increase as the company pursues higher-

value (i.e. higher margin) business within its Aerospace segment (i.e. from basic panels to

electronic assemblies). Two recent acquisitions should also significantly increase in-house utilization

rates over the coming year.

• We are modeling EBITDA margins to improve from 6.9% in FY15 to 13.1% in FY18 (November fiscal

year).

• With the stock trading at 6.8x FY+1 EV/EBITDA versus comparable companies at 8.0x, we view FTG

as a good risk-return investment opportunity and a compelling way to leverage the continued

improvement in the commercial aerospace sector. On FY18e EBITDA, which we feel better

represents the full benefit of the company’s two recent acquisitions, the stock is trading at 5.4x.


Industry Outlook – Leveraged To Aerospace and Defence


• In our opinion, the macro environment remains very favorable for FTG. Order backlogs at

Boeing and Airbus remain at record levels for both companies. On a combined basis, there are

~12,130 in these two aircraft manufacturers alone. Between 2015 – 2034, 38,050 new commercial

aircraft are expected to be delivered to the global market.

• This backlog, combined with new aircrafts such as the Boeing 787 and the Airbus A350, as well

as the updates and re-engineering of the Boeing 737 (i.e. Max) and Airbus A320 (i.e. NEO) bode

well for this market in the coming years. Both Boeing and Airbus are planning to increase their

annual production volumes across a number of its product lines.

• There are also new entrants into this market for single aisle aircraft, which creates new supply

opportunities for lower-tier suppliers. These new entrants include Bombardier’s C-Series and

China’s C-919 aircraft. FTG has exposure to all the aforementioned models.

• Within all commercial aircraft markets, the end customer, or airline, geographic distribution is

shifting with a higher percentage of customers in Asia. This is driving a demand for higher Far

East content on each aircraft and this push is being seen through the whole supply chain. To

address this, FTG has established a wholly-owned operation in Tianjin, China and JV for printed

circuit boards .

Industry Outlook – Robust Aerospace Cycle


Source: Boeing Current Market Outlook, 2015 - 2034

Industry Outlook – Defence on the (Slow) Uptick


• As highlighted in Deloitte’s 2016 Global Aerospace and Defence Sector Outlook report, global

aerospace and defence spending has largely been impacted by decreased revenues in the US

defense subsector. However, a return to growth in 2016 is expected to be fueled by increases in

the US defence budget, a resurgence of global security threats and growth in defence budgets

of key nations around the world.

Source: US Department of Defence

FTG Circuits – The Steak

• FTG Circuits is a leading manufacturer of high technology/high reliability printed circuit boards. Its

customers are technological and market leaders in the aviation, defence and other high technology

industries. Revenue growth in FY14 and FY15 was 19.4% and 20.6%, respectively, although we expect

this organic growth to moderate given higher utilization rates at its Circuits facilities.

• A printed circuit board consists of one or more layers of etched wiring bonded to a board fabricated

form insulating material designed to act as a base for, and to interconnect, microprocessors, semi-

conductors, integrated circuits and other electronic components.

• Profit margins on complex circuits are typically higher for those utilizing advanced materials meeting

high reliability specifications or advanced production processes than those on standard materials

designed to meet commercial specifications. As such, the company’s focus has been to produce a

higher percentage of advanced technology boards in an effort to optimize its operating margins.

• Of note, the company is the supplier of choice for the two largest avionics manufacturers in North

America. In fact, the company is the sole supplier of multi-layer printed circuits for one of its largest

clients. The company also recently announced it had renewed (and expanded the scope of) two long-

term agreements with a prominent US-based Aerospace, Space and Defense Contractor to supply a

variety of high technology printed circuit boards used on major airframe platforms (renewals are

valued at over US$10M annually).



Breadth of Technology Supports Customers’ Supply Chain

Consolidation initiatives

Moving Up The Value Chain

HDI

Micro vias

Sequential lamination

Filled vias

Rigid flex

High frequency

RF circuitry

Hybrid materials

RF circuitry

Digital circuitry

Thermal Manageme

nt

Source: Company filings

FTG Aerospace – The Sizzle


• FTG Aerospace manufactures illuminated cockpit panels, keyboards, bezels, sub-assemblies andassemblies for OEMs of avionics products, as well as for airframe manufacturer around the world. Theseproducts are interactive devices that display information and contain buttons and switches that can beused to input signals into an avionics box or aircraft.

• FTG Aerospace lighting products can be found in commercial and military applications globally. FTGAerospace has obtained Preferred Supplier Status to some of the world’s largest Airframe Manufacturersand Original Equipment Manufacturers.

• In display products, FTG Aerospace has expanded into higher level assemblies, which is opening up new,higher margin opportunities. The company is also addressing the demand for higher Far East contentthrough the establishment of a wholly owned operation in Tianjin, China for cockpit products.

• Of note, on January 30, 2015, the company announced it had signed a supply contract with SAVIC for thedesign, development, certification support and long-term production of various Control Panel Assembliesfor the Display System on the new COMAC C919 aircraft. On September 3, 2015 the cockpit control panelassemblies received air worthiness tags from the CAAC. This contract could be worth $6 – 7M annuallyto FTG once deliveries of C919 begin, which is expected over the next several years.

• In our opinion, FTG Aerospace represents the key growth driver for the company (it has been as high as23% in Q1 FY16) given the relatively low level of utilization (i.e. margin expansion opportunities) within itsmanufacturing facilities, recent new win momentum, new product introductions, and continued industrytailwinds.

FTG Aerospace Product Growth


Technology growth drives higher

content per aircraft and enables

faster revenue growth

Assemblies29%

Panels36%

Keyboards35%

2015 Technologies

Assemblies1%

Panels81%

Keyboards18%

2003 Technologies

Source: Company filings

Recent Key Aerospace Announcements

• On July 18, 2016, FTG announced a new $2.3M contract to supply over 600 cockpit panels and panel

assemblies, representing equipment for 6 simulators for a new military tanker aircraft program in the

US. This contract was bid and won from FTG’s recently acquired Photo Etch business.

• On May 3, 2016, the company announced it had been awarded a new 5-year Long Term Agreement

with Korry Electronics for the supply of cockpit control panels for the Bombardier C-Series.

• On September 3, 2015, the company announced that the cockpit control panel assemblies being

developed by SAVIC as part of the Display System for the C919 aircraft had received airworthiness tags

from the CAAC (Civil Aviation Administration of China).

• On March 19, 2015, the company announced that it had been qualified for the supply of a range of

cockpit panels in accordance with MIL – DTL – 7788.

• On February 9, 2015, the company announced it had been awarded a new forty-two month (three and

a half year) Enterprise Sourcing Agreement from Rockwell Collins for the supply of Printed Wiring

Boards. The agreement incorporates a variety of technologies for use on major airframe platforms

across Business Regional, Air Transport and Government Systems market applications. This new

contract represents an estimated 15% revenue increase over the previous contract. FTG was successful

in maintaining all legacy programs while capturing new scope across a number of programs.


Strong Tailwinds To Drive Operating Leverage

• From a revenue perspective, we believe recent contract renewals, along with continued market

share gains, should enable FTG to maintain at least a low-single digit organic growth profile within

its Circuits business keeping in mind that this business is running at relatively high utilization rates.

• Within Aerospace, we believe growth will be driven by market share gains (new customers/design

ins), along with the capture of new scope across existing programs / customers. We are modeling

5 - 8% organic growth within Aerospace for our forecast period, although there could be lumpy

order flow (i.e. to the upside).

• In our opinion, the most exciting financial aspect of the FTG story is the potential operating

leverage in this business. The company reported fiscal Q2 EBITDA margins of ~8.8%, although we

believe this was being dragged down by the Aerospace division, which is operating at a slight

adjusted operating loss of ~$283k due to capacity under-utilization (before corporate costs) and

operating losses from its recent acquisition of Photo Etch (~$380k). Meanwhile, the Circuit division

generated operating margins of 12%.

• Furthermore, keep in mind that within cost of sales, ~70% of costs are variable, while 30% are

fixed. The company anticipates contribution margin of ~30% on incremental revenue, which

highlights the potential leverage in this business.


M&A To Accelerate Operating Leverage Improvements

• Aside from organic growth, we expect revenue and margin growth to be driven by acquisitions.

• On March 18, 2016, the company acquired the assets of Fort Worth, Texas-based Photo Etch forUS$2.7M (FY15 revenues were US$6.2M). Photo Etch is a global provider of illuminated display andcontrol panels, simulation systems and complex electronic assemblies for commercial and militaryapplications.

• The acquisition is expected to accelerate FTG’s penetration of a significant number of defencecustomers, primarily in the US. The acquisition should also improve utilization rates within FTG’sCircuits facilities as customer contracts are moved from Teledyne PCT’s Fort Worth’s facilities aspart of a transition period expected to last through the balance of 2016.

• This acquisition has shown some early success as evidenced by a recently announced $2.3Mcontract for the supply of over 600 cockpit panels and panel assemblies, representing equipmentfor 6 simulators for a new military tanker aircraft program in the US. Design work will beundertaken at Fort Worth, while production is planned for FTG Aerospace – Chatsworth.

• During the company’s most recent fiscal Q2 (ended May), Photo Etch generated ~$1.28M for ~2.5months worth of contribution and an operating burn of $380k. We expect this burn to ease as thecompany completes the integration and transition of work to its own aerospace facilities atChatsworth, California, Toronto and to a lesser degree China.


M&A To Accelerate Operating Leverage Improvements

• On July 8th, FTG also closed an agreement with Teledyne Technologies (TDY–N, NR) to acquire the

assets of Teledyne’s printed circuit technology (“PCT”) business for US$9.3M in cash. For over 50

years, Teledyne PCT, based in Hudson, New Hampshire, has designed an manufactured rigid-flex

printed circuit boards and assemblies used in the defense, aerospace, and oil and gas industries.

For each of the last three years, Teledyne PCT generated between US$15 – 20M in revenues. For its

3-months ended February 2016, Teledyne PCT generated US$5.4M and EBIT of $236k.

• Similar to the Photo Etch transaction, FTG is acquiring equipment, working capital, product

designs, process known-how and customers contracts, most of which are expected to transition to

FTG, thereby increasing the utilization rates of both its Aerospace and Circuits facilities. The

acquisition will also add significant scale to FTG’s US operations and will accelerate its participation

in a number of US programs.

• Once the company fully integrates Photo Etch and Teledyne PCT into its existing facilities, we

estimate that utilization rates with Aerospace Chatsworth, Toronto and China to be in the ~75% /

60% and 25% range (up from 20%, 50% and 20% currently).

• In incorporating both acquisitions, we assume ~25% revenue attrition.


Financial Analysis

• For the purposes of our model, we have factored EBITDA margins to improve from 6.9% for FY15(ending November) to 13.1% in FY17. The key driver of the margin improvement is based on thetransition of Photo Etch and Teledyne PCT into FTG’s Aerospace and Circuits facilities (where theycould potentially drive incremental gross margin contributions of ~30%). Note that our calculationof EBITDA differs slightly from the company’s, mostly around the treatment of foreign exchangegains/losses (we exclude this from our calculation, the company does not).

• On the balance sheet, the company ended fiscal Q2 (ended May) with $1.8M in cash, against$8.2M in debt. Subsequent to quarter-end, there were several transactions completed, including$6.9M financing at $2.00/sh ($5.82M net to FTG) and the acquisition of the assets of Teledyne PCTfor $12.1M (financed with cash on hand and proceeds from FTG’s US$6M operating facility andUS$9M revolving loan).

• We estimate that post-Teledyne PCT, FTG should have cash of ~$2.8M against debt of $15M (ornet debt of ~$12M). We also estimate the company has ~US$9.8M remaining in its operating andrevolving loan facilities.

• The company has ~$6.7M of Canadian investment tax credits, US gross tax loss carry-forwards of~$5.4M, China gross tax loss carry-forwards of ~$1.9M, and SR&ED deductible expenditures of~$7.1M to be applied against future taxes. While the company is expected to accrue a ~25% taxrate, actual cash taxes should be nominal for our forecast period.


Initiating Coverage With a Buy and $4.00 Target

• Valuation wise, FTG is currently trading at 6.8x FY17e (ending November 2017) EV/EBITDA and 5.4x

FY18e. We feel FY18e provides a better representation of the full benefit of the company’s two

recent acquisitions of Photo Etch and Teledyne PCT.

• By comparison, comparable companies are trading in the ~8x next fiscal year. For the purposes of

our valuation analysis, we have incorporated lower-margin contract manufacturers, against higher

margin aerospace and defense manufacturer.

• Applying the average multiple of 8x against our FY18e (ending November 2018) EBITDA estimate

of $13.4M results in our $4.00 target price.

• Given the 63% potential return, we are initiating coverage with a Buy rating.


Trading At A Discount To Peers


2-Year 2-Year

Ticker FY - 1 FY1 FY + 1 Revenue CAGR FY - 1 FY1 FY + 1 EBITDA CAGR FY -1 FY1 FY + 1

Comps

CAE CAE.TO 2.2 x 2.0 x 1.9 x 6% 10.9 x 8.7 x 8.2 x 16% 19.4 x 18.5 x 16.7 x

Lockheed Martin LMT 2.0 x 1.8 x 1.8 x 4% 14.0 x 12.7 x 12.7 x 5% 22.3 x 20.4 x 19.8 x

General Dynamics GD 1.5 x 1.5 x 1.5 x 1% 10.0 x 9.8 x 9.7 x 1% 16.3 x 15.3 x 14.7 x

United Technologies UTX 1.9 x 1.8 x 1.7 x 3% 9.8 x 9.6 x 9.5 x 2% 23.5 x 16.2 x 15.4 x

Northrop Grumman NOC 1.9 x 1.9 x 1.8 x 3% 12.5 x 12.9 x 12.0 x 2% 21.0 x 19.9 x 18.6 x

Raytheon RTN 1.9 x 1.8 x 1.7 x 5% 12.6 x 11.9 x 11.4 x 5% 20.9 x 19.1 x 18.1 x

Airbus AIR.PA 0.8 x 0.7 x 0.7 x 4% 7.5 x 8.1 x 7.0 x 4% 14.7 x 15.4 x 12.7 x

Boeing BA 0.9 x 0.9 x 0.9 x 0% 8.8 x 11.0 x 7.7 x 7% 17.7 x 21.1 x 13.7 x

Average 1.6 x 1.6 x 1.5 x 3% 10.8 x 10.6 x 9.8 x 5% 19.5 x 18.2 x 16.2 x

Celestica CLS 0.2 x 0.2 x 0.2 x 4% 4.6 x 4.3 x 4.1 x 6% 26.4 x 9.6 x 9.0 x

Benchmark BHE 0.3 x 0.4 x 0.4 x -2% 5.5 x 6.1 x 5.5 x 0% 12.8 x 17.5 x 14.5 x

Flextronics FLEX.O 0.3 x 0.3 x 0.3 x 1% 6.4 x 6.2 x 5.7 x 5% 15.9 x 10.5 x 9.3 x

Sanmina SANM.O 0.3 x 0.3 x 0.3 x 3% 5.5 x 5.5 x 5.1 x 4% 5.8 x 10.2 x 9.4 x

Plexus PLXS.O 0.5 x 0.5 x 0.5 x 3% 8.1 x 8.1 x 7.0 x 8% 16.5 x 17.1 x 13.6 x

Jabil JBL 0.3 x 0.3 x 0.3 x 1% 4.3 x 3.9 x 3.7 x 9% 13.5 x 11.0 x 9.9 x

Astronics ATRO.O 1.3 x 1.3 x 1.3 x 2% 7.3 x 8.0 x 7.1 x 1% 15.4 x 17.3 x 15.2 x

TTM Technologies TTMI.O 0.9 x 0.8 x 0.7 x 11% 6.6 x 5.5 x 5.3 x 12% -36.8 x 9.5 x 8.6 x

Esterline ESL 1.4 x 1.2 x 1.2 x 6% 7.8 x 8.9 x 7.5 x 2% 19.5 x 13.6 x 11.5 x



Firan FTG.TO 1.0 x 0.9 x 0.7 x 16% 14.4 x 10.4 x 6.9 x 45% 5.2 x 14.4 x 10.7 x

Source: Company filings, Thomson, Beacon Securities

Firan Technology Group: Peer Group Analysis

EV/Sales EV/EBITDA P/E

Potential Risks To Our Analysis

Competition – FTG operates in a competitive market (key players include TTM Technologies, Astronics,and Esterline), which could drive pricing pressure. The company has alleviated this tension by movingbeyond commoditized offerings and focusing on complex, higher value (i.e. higher margin)technologies/products, which is expected to drive higher margins. We believe this is expected by thecompany’s EBITDA margins of 8.8% (and increasing), which surpass traditional contract manufacturersat 5% (and we’d argue that FTG’s margins should further increase as utilization rates improve).

Lumpy Sales Cycles – While the company does have some long-term contracts, much of its businessis shorter-term in nature, which creates potentially lumpy quarterly revenue contributions.

Customer Concentration – The company generates ~50.5%% of revenues from 5 customers,including two that represent 20.6% and 9.4% respectively, which introduces customer concentrationrisk.

Forex – FTG generates ~80% of sales in US dollars and the remainder in Canadian dollars, while costsare split ~80%/20% Canadian to US, which exposures the company to forex fluctuations.

Execution Risks – In our opinion, a lot of the potential upside to shares of FTG will come from thecompany’s ability to properly integrate its recent acquisitions; more specifically, to movemanufacturing to its internal facilities, which introduces execution risks. There is also risk of customerattrition during this integration (we have factored 25% in our model).


Management and Board of Directors

Bradley C. Bourne, President/CEO & Board Member – Mr. Bourne spent 17 years at Spar Aerospace in

roles of increasing responsibility within their Space Robotics business, their satellite business and the

corporate office. Mr. Bourne joined FTG in 2002 as President and became CEO in 2004.

Joe Ricci, VP & CFO – Over a 40 year aerospace career, Mr. Ricci has undertaken roles at VP, CFO and

Corporate Secretary at FTG. Prior to that he was at Spar Aerospace for 19 years in various senior

financial, operational and corporate office positions.

Hardeep Heer, VP President Engineering & CTO – Prior to joining FTG, he has held senior positions

with major Printed Circuit Board manufacturing companies in North America. His 30+ years of

experience in this industry includes setting up of two advanced PCB manufacturing shops.

Peter Dimopoulos, VP, Business Development – Mr. Dimopoulos is responsible for driving FTG’s global

growth and continued market leadership by delivering and supporting the full range of FTG products,

services and solutions to organizations in established and new markets around the world.


Management and Board of Directors

Robert J. Beutel (Chairman), Executive Officer of Oakwest Corporation Limited

Bradley C. Bourne, President and CEO of FTG

Edward C. Hanna, Corporate Director and Business Consultant, formerly CEO and Chairman of

Glendale International Corp.

Raymond G. Harris, Independent Consultant, Director of International Road Dynamics, formerly

Partner of Deloitte & Touche

David F. Masotti, Corporate Director and Business Consultant, Co-founder, Director of Defyrus Inc.

Mike Andrade, CEO of Morgan Solar, formerly President, Diversified Markets at Celestica

Insiders own ~9.9M or ~40% of fully diluted shares outstanding, which includes 7,4M shares held by

Oakwest Corporation, where Mr. Beutel is a senior officer and shareholder .


Capital Structure


Basic Shares Outstanding 22,103,201 - Includes recent 3.45M shares issued at $2.00/sh for

gross proceeds of $6.9M

Options 335,820 - Average exercise price of ~$0.45

Preferred Shares 1,775,000 - Preferred are convertible to common at 1-for-1 and are held by CEO Brad Bourne

Fully diluted shares outstanding 24,214,021

(ignoring strike prices)

Firan Technology Group - Capital Structure

Source: Company filings, Beacon Securities

August 4, 2016 | Page 21 Gabriel Leung| 416.507.3963 | [email protected]

Firan Technology Group Corp.

Firan Technology Group - Income Statement

FY14 FY15 Q1 FY16 Q2 FY16 Q3 FY16 Q4 FY16 FY16 FY17 FY18

(C$000) 27-Feb-16 29-May-16 29-Aug-16 30-Nov-16

Revenues:

Circuit Segment Sales 45,055 54,315 12,560 14,168 15,233 16,249 58,210 64,100 66,664

Aerospace 15,644 17,730 4,369 5,597 7,059 8,657 25,682 32,867 35,496

Total revenues 60,699 72,045 16,929 19,765 22,293 24,906 83,893 96,967 102,161

Cost of sales:

Cost of sales 43,867 52,048 12,664 14,378 16,274 18,181 61,497 68,704 70,491

Depreciation of plant and equipment 1,646 1,963 513 527 527 527 2,094 2,108 2,108

Total cost of sales 45,513 54,011 13,177 14,905 16,801 18,708 63,591 70,812 72,599

Cost of sales % of revenues 72.3% 72.2% 74.8% 72.7% 73.0% 73.0% 73.3% 70.9% 69.0%

Gross profit 15,186 18,034 3,752 4,860 5,492 6,198 20,302 26,155 29,562

Gross margins 25.0% 25.0% 22.2% 24.6% 24.6% 24.9% 24.2% 27.0% 28.9%

Operating expenses:

SG&A 9,430 10,018 2,452 2,858 3,500 3,500 12,310 14,400 14,800

R&D 3,777 5,558 787 877 950 950 3,564 3,800 3,800

Recovery of R&D costs -418 -492 -70 -70 -70 -70 -280 -280 -280

Depreciation of PP&E, amortization of intangibles 168 156 40 58 58 58 214 232 232

Recovery of investment tax credits -6,736 -167 -180 0 0 -347 0 0

Goodwill impairment 0 0 0 0 0 0 0 0

Interest expense on short-term debt 29 34 0 20 20 20 60 80 80

Interest expense on long-term debt 364 413 40 44 112 112 308 449 449

Interest accretion due to early repayment of AMIS loan 556 0 0 0 0 0 0 0

Bargain in purchase gain -1,611 0 0 -1,611 0 0

Severance and restructuring expenses 0 670 0 0 670 0 0

Foreign exchange loss (gain) -610 -2,054 -55 360 0 0 305 0 0

Total expenses 12,740 7,453 3,027 3,026 4,570 4,570 15,193 18,681 19,081

Income before taxes 2,446 10,581 725 1,834 922 1,627 5,108 7,474 10,481

Current income tax expense 48 9 16 15 230 407 668 1,869 2,620

Deferred income tax expense 240 1,024 259 463 0 0 722 0 0

288 1,033 275 478 230 407 1,390 1,869 2,620

Tax rate 11.8% 9.8% 37.9% 26.1% 25.0% 25.0% 27.2% 25.0% 25.0%

Net income 2,158 9,548 450 1,356 691 1,221 3,718 5,606 7,861

Attributable to :

Non-controlling interest 35 11 0 0 0 0 0 0 0

Equity holders of FTG 2,193 9,537 450 1,356 691 1,221 3,718 5,606 7,861

EPS :

Basic 0.12 0.53 0.02 0.07 0.03 0.06 0.18 0.25 0.36

FD 0.11 0.47 0.02 0.07 0.03 0.05 0.17 0.23 0.32

EBITDA 4,107 4,964 1,108 1,734 1,651 2,357 6,850 10,391 13,398

EBITDA margins 6.8% 6.9% 6.5% 8.8% 7.4% 9.5% 8.2% 10.7% 13.1%


August 4, 2016 | Page 22 Gabriel Leung| 416.507.3963 | [email protected]

Firan Technology Group Corp.

FY14 FY15 Q1 FY16 Q2 FY16

(C$000) 27-Feb-16 29-May-16

Assets:

Current assets:

Cash 641 3,160 2,228 1,771

Accounts receivable 13,289 12,987 12,259 13,457

Taxes receivable 251 231 300 371

Inventories 10,426 11,122 11,407 14,591

Prepaid expenses 564 979 865 1,633

Total current assets 25,171 28,479 27,059 31,823

Non-current assets:

Plant and equipment, net 5,643 5,644 5,516 5,604

Deferred income taxes 2,145 2,876 2,515 1,879

Investment tax credits receivable 6,736 6,903 7,083

Intangible and other assets, net 148 100 88 996

Deferred development costs 387 462 398

Total assets 33,107 44,222 42,543 47,783

Liabilities and equity: 8,160

Current liabilities:

Accounts payable and accrued liabilities 10,021 10,970 8,993 9,579

Bank indebtedness 0 3,520

Provisions 410 366 379 374

Customer deposits, net of deferred development 1,531 1,044 653 276

Current portion of subordinated loan 0 0

Current portion of long-term bank debt 251 1,058 1,071 1,033

Total current liabilities 12,213 13,438 11,096 14,782

Non-current liabilities:

Long-term bank debt 1,232 4,234 4,017 3,607

Deferred tax payable 1,460 1,492 1,525

Subordinated loan 4,219 0

Government assistance 339 0

Total liabilities 18,003 19,132 16,605 19,914

Equity

Deficit -7,909 1,628 2,078 3,428

Accumulated other comprehensive (loss) -312 -233 142 693

-8,221 1,395 2,220 4,121

Share capital:

Common shares 12,681 13,075 13,090 13,109

Preferred shares 2,218 2,218 2,218 2,218

Contributed surplus 8,411 8,373 8,381 8,388

Total equity attributable to FTG's shareholders 15,089 25,061 25,909 27,836

Non-controlling interest 15 29 29 33

Total equity 15,104 25,090 25,938 27,869

Total liabilities and equity 33,107 44,222 42,543 47,783

Firan Technology Group - Balance Sheet


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As at July 31, 2016 #Stocks Distribution

Buy 56 66% Buy Total 12-month return expected to be > 15%

Speculative Buy 14 16% Speculative Buy Potential 12-month return is high (>15%) but given elevated risk, investment could result in a material loss

Hold 5 6% Hold Total 12-month return is expected to be between 0% and 15%

Sell 0 0% Sell Total 12-month return is expected to be negative

Under Review 10 12%

Tender 0 0% Tender Clients are advised to tender their shares to a takeover bid or similar offer

Total 85 100%

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