Solid State — Update 1 November 2015

Solid State (LSE: SOLI)

Last close As at 24/04/2024

GBP13.75

0.00 (0.00%)

Market capitalisation

GBP155m

More on this equity

Research: Industrials

Solid State — Update 1 November 2015

Solid State

Analyst avatar placeholder

Written by

Industrials

Solid State

Expectations for material contract modified

Trading update

Industrial support services

2 November 2015

Price

472.5p

Market cap

£40m

Net debt (£m) at end March 2015

2.5

Shares in issue

8.4m

Free float

73%

Code

SOLI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(39.4)

(47.8)

(22.5)

Rel (local)

(42.0)

(45.5)

(23.1)

52-week high/low

€922.50

€560.00

Business description

Solid State is a high value-add manufacturer and specialist design-in distributor to the electronics industry. It has expertise in industrial/ruggedised computers, electronic components, antennas, microwave systems, secure communications systems and battery power solutions.

Next event

Interims

24 November 2015

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Solid State is a research client of Edison Investment Research Limited

Solid State has issued a pre-close trading update advising that although the first half performance represented a satisfactory start to the year, second half revenues and profits are likely to be significantly lower than management expectations because of delays in deliveries relating to a major contract that was expected to benefit both H216 and FY17. We revise our FY16 estimates and place our FY17 estimates and valuation under review until there is greater clarity on delivery schedules.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

32.1

2.4

28.5

8.5

16.6

1.8

03/15

36.6

3.2

37.4

12.0

12.6

2.5

03/16e

44.0

3.2

35.4

12.0

13.3

2.5

03/17e

N/A

N/A

N/A

N/A

N/A

N/A

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Solid first half

Solid State made a satisfactory start to the year despite some softening in its target markets, as reported by industry peers. Management expects H116 revenues of c £21m (H114: £17.13m). This strong growth is primarily attributable to the first phase of deliveries under a major high-profile contract, with additional contribution from Ginsbury Electronics, acquired in April 2015. Management expects H116 PBT to be c £1.50m (H115: £1.55m) as the additional revenues associated with the major contract were offset by an increase in costs to support the initial phase. We note that performance is typically weighted towards the stronger second half.

Delays in deliveries for major contract affect H2

Solid State has announced that H116 deliveries for the major contract will be significantly lower than it had expected. In addition, management notes a general market softening, although this factor on its own would not have prompted the market update. We reduce our FY16 revenue estimate from £57.0m to £44.0m to reflect the delay in ramping up deliveries for the major customers. This results in a reduction in our pre-tax profit estimate (adjusted for share options) from £5.3m to £3.2m, which is similar to FY15 levels. We revise our EPS estimate from 57.8p to 35.4p. Assuming that management retains its stated dividend policy of 2.5x cover, we revise our FY16 DPS estimate from 20.0p to 12.0p.

Valuation: Awaiting clarity on delivery schedule

The share price has dropped from 725p on the news. Our previous SOTP valuation was based on FY16 earnings, with profits from the major contract contributing around one-third of the 920p total. The contract is a high-profile one for customers and Solid State is confident that it is fulfilling its obligations to them, so it is reasonable to assume that deliveries will pick up at some point and contribute to group value. Until there is clarity regarding the delivery schedule, we place our FY17 estimates and our valuation under review.

Exhibit 1: Financial summary

£'000

2014

2015

2016e

Year end 31 March

PROFIT & LOSS

Revenue

 

 

32,085

36,559

43,989

Cost of Sales

(22,729)

(25,396)

(31,670)

Gross Profit

9,357

11,164

12,318

EBITDA

 

 

2,809

3,766

3,845

Operating Profit (pre amort. of acq intangibles & SBP)

 

2,461

3,273

3,297

Amortisation of acquired intangibles

0

0

0

Share-based payments

(235)

(211)

(250)

Exceptionals

0

0

0

Operating Profit

2,226

3,062

3,047

Net Interest

(72)

(48)

(75)

Profit Before Tax (norm)

 

 

2,389

3,224

3,222

Profit Before Tax (FRS 3)

 

 

2,154

3,014

2,972

Tax

(278)

(122)

(268)

Profit After Tax (norm)

2,111

3,102

2,955

Profit After Tax (FRS 3)

1,876

2,892

2,705

Average Number of Shares Outstanding (m)

7.4

8.3

8.4

EPS - normalised (p)

 

 

28.5

37.4

35.4

EPS - normalised fully diluted (p)

 

 

28.4

36.3

34.7

EPS - FRS 3 (p)

 

 

25.3

34.9

32.4

Dividend per share (p)

8.5

12.0

12.0

Gross Margin (%)

29.2

30.5

28.0

EBITDA Margin (%)

8.8

10.3

8.7

Operating Margin (before GW and except.) (%)

7.7

9.0

7.5

BALANCE SHEET

Fixed Assets

 

 

5,995

6,643

8,174

Intangible Assets

4,936

5,400

5,845

Tangible Assets

1,059

1,243

2,328

Current Assets

 

 

15,744

16,142

17,464

Stocks

4,575

5,402

6,207

Debtors

10,484

9,003

10,072

Cash

685

1,738

1,185

Current Liabilities

 

 

(10,926)

(10,039)

(10,795)

Creditors including tax, social security and provisions

(7,888)

(5,838)

(6,995)

Short term borrowings

(3,038)

(4,201)

(3,800)

Long Term Liabilities

 

 

(405)

(355)

(355)

Long term borrowings

0

0

0

Other long term liabilities

(405)

(355)

(355)

Net Assets

 

 

10,407

12,391

14,487

CASH FLOW

Operating Cash Flow

 

 

2,214

2,680

3,401

Net Interest

(72)

(48)

(75)

Tax

(161)

(476)

(476)

Capital expenditure

(305)

(487)

(1,000)

Capitalised product development

(8)

(661)

(270)

Acquisitions/disposals

(2,323)

0

(731)

Financing

2,618

(308)

0

Dividends

(603)

(810)

(1,000)

Net Cash Flow

1,359

(110)

(152)

Opening net debt/(cash)

 

 

2,304

2,353

2,463

HP finance leases initiated

0

0

0

Other

1,408

0

0

Closing net debt/(cash)

 

 

2,353

2,463

2,615

Source: Company accounts, Edison Investment Research

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority (www.fsa.gov.uk/register/firmBasicDetails.do?sid=181584). Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2015 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Solid State and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.
Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2015. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

More on Solid State

View All

Latest from the Industrials sector

View All Industrials content

Gaming Realms — Update 21 October 2015

Gaming Realms

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free