Investment Case Frequentis: Stable growth in high-security business

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Investment case Frequentis 26 Jan 2021

Frequentis offer its clients market leading communication and information systems for the Air Traffic Control and Public Transport sectors, where entry barriers are high due to regulations on the suppliers. We foresee continued revenue growth. The company is trading at a rebate compared to its peers. We arrive at a justified share price of EUR 21.8 per share in a combined Base case-valuation. This corresponds to a potential upside of 19 percent for the coming 12 months.

Market leader with the possibility to expand its business

With some 500 clients in 140 countries in its main business area, Air Traffic Management, Frequentis holds a dominant position with its communication and information solutions for mission-critical air traffic control centers. This segment constitutes around 70 percent of Frequentis revenues and includes some business in the military defense segment. Order intake has increased despite the effects covid-19 has had on travel restrictions. Within a year or so travelling ought to return to normal conditions. Otherwise, there is a risk that these investments will be affected.

Frequentis enjoys a strong financial position being a mid-size player in a niche, where military defense company giants such as Lockheed Martin and others are focused on selling hardware. Meanwhile Frequentis, selling complementary systems, is joining forces with these larger companies in some projects, as with Thales for instance.

The client base is already found in its second business area, Public & Safety Transport. The company may also expand its business more into the Railway segment. This may also be an opportunity if the travelling habits change from air to land based in the wake of the Covid-19 pandemic.

Order intake representing one and a half years of revenue

Following a strong H1 2020 report, Frequentis had 445 million Euro in orders at hand as of 30 June 2020, with a visibility of one and a half year. This represented a 29 percent increase in order intake compared to H1 2019. Clients are mainly public players (air traffic control authorities, state railways, police, fire and rescue services, coast guard), which means that the counterparty risk is very low.

Upside in operating margin and valuation

Due to high R&D-costs, Frequentis EBIT-margins are at single-digit levels. One way to increase profitability is to streamline R&D-operations and to encourage customers to choose more generic solutions.

We estimate the combined DCF- and peer group value of the Frequentis stock in our base case-scenario to 21.8 Euro per share. This corresponds to a 19 percent share price potential. In our Bear- and Bull-scenarios the weighted share values are 17.0 and 26.4 Euro, respectively.

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