Frequentis AG: A Growth Catalyst Amid Near-Term Challenges

Frequentis AG (ETR:FQT), a global leader in safety-critical communication systems for air traffic control, defense, and public safety, is positioned as a compelling investment opportunity despite near-term headwinds. With robust financial performance, a resilient order pipeline, and strategic initiatives driving long-term growth, the company's valuation appears undervalued relative to its future potential.

Financial Fortitude Amid Geopolitical Volatility

Frequentis delivered a standout 2024, with revenue rising 12.4% to €480.3 million and EBITDA expanding 22.5% to €54.1 million. The company's order backlog surged 21.8% to €724 million, signaling strong demand for its safety-critical solutions. While geopolitical tensions and supply chain delays have caused project delays, the backlog ensures visibility into future earnings. Notably, its equity ratio improved to 44.3%, and net cash stood at €81.8 million—a fortress balance sheet that provides flexibility to navigate near-term disruptions.

Valuation: A Premium for Growth, Not Overvaluation

At a P/E ratio of 30.28 (as of June 2025), Frequentis trades at a premium relative to its historical average. However, this multiple is justified by its growth trajectory. Analysts project 10% revenue growth in 2025, with an EBIT margin target of 6.5%-7.0%. The company's focus on high-margin software solutions—such as drone management systems and 5G-enabled mission-critical communications—could further expand margins.

The stock's 39.85% year-to-date return through June 2025, outperforming the FTSE Global All Cap Index by +36.35%, reflects investor optimism. While some may argue the P/E is elevated, the company's order backlog (equivalent to 150% of 2024 revenue) and software-driven innovation pipeline suggest earnings growth could justify current valuations.

Growth Drivers: Software Transformation and Defense Spend Surge

Frequentis's strategic shift toward software-centric solutions is a key growth lever. Its “Mission Critical Software” initiative aims to integrate AI and cloud-based platforms into legacy systems, addressing demand for modernized air traffic control and public safety infrastructure. For instance, its recently launched drone management system targets the growing commercial and military drone market, a sector expected to reach €35 billion by 2030.

Meanwhile, defense spending remains a tailwind. Geopolitical instability in Eastern Europe and the Indo-Pacific has spurred investment in military infrastructure. Frequentis's public safety and defense segments, which account for over 60% of revenue, are well-positioned to capture this demand. The company's 2024 order intake grew 15.7% to €583.8 million, with defense contracts accounting for a significant portion.

Near-Term Risks: Manageable, Not Existential

The primary risks—geopolitical delays, inflation, and supply chain bottlenecks—are cyclical rather than structural. While project timelines may be extended due to procurement complexities, the backlog ensures these challenges are temporary. Additionally, personnel costs rose 14.2% in 2024, but the company has mitigated this by outsourcing non-core functions and automating workflows.

ESG Integration: A Competitive Advantage

Frequentis has embedded ESG into its strategy, aligning with EU regulations like the Corporate Sustainability Reporting Directive (CSRD). ESG targets now influence executive compensation, and the company aims to reduce energy consumption by 30% by 2030. This commitment not only mitigates regulatory risks but also enhances its reputation in public-sector contracts, where sustainability criteria are increasingly critical.

Investment Thesis: Buy with a Long-Term Horizon

Frequentis is undervalued when considering its order pipeline, software-driven growth, and defensive end markets. While near-term volatility may test patience, the company's balance sheet and strategic priorities position it to capitalize on secular trends in safety-critical infrastructure. Analysts' consensus “Buy” rating and a 2025 target price of €41.80 (vs. a June 2025 price of €50.20) may understate upside potential if software margins expand.

Investors should view dips as buying opportunities. The stock's dividend yield (0.72%) is modest, but the company's 12.5% dividend increase in 2024 signals confidence in cash flow stability.

Conclusion: A Steady Hand in Turbulent Times

Frequentis AG's combination of defensive revenue streams, a robust order book, and transformative software initiatives makes it a rare blend of stability and growth. While near-term risks warrant caution, they are outweighed by the company's long-term potential. For investors with a 3–5 year horizon, Frequentis offers a compelling entry point to benefit from the secular rise in demand for mission-critical technology.

Rating: Buy
Price Target: €55.00 (2026)
Risk Rating: Moderate (exposure to geopolitical and supply chain risks)