Solid State — Update 1 June 2016

Creasefield specialises in the design and manufacture of custom battery packs. While Solid State’s existing batteries activity is primarily focused on the oil and gas and sub-sea sectors, Creasefield is also involved in the aerospace, medical, security and water industries. While Solid State’s solutions are based primarily on lithium-ion technology, Creasefield is also expert in alkaline battery technology. The combination enhances the group’s existing engineering and production capabilities for batteries and creates opportunities for cross-selling.

The consideration is payable in cash, supported by proceeds from settlement of the MoJ contract. For the 12 months ended March 2016, Creasefield recorded a £60k operating loss on £4.8m turnover. Management expects that Creasefield will make a modest positive profit contribution (after integration costs) during FY17 and a more significant profit contribution during FY18. Our estimates take a prudent view, modelling incremental revenues attributable to Creasefield at historic levels, ie £4.0m for 10 months and operating profit at break-even. We therefore raise our FY17 group revenue estimate from £39.6m to £43.6m, while leaving our FY17 PBT and EPS estimates unchanged.

The share price has rallied slightly since the trading update at the end of April, which noted that the negotiations regarding settlement of the terminated contract with the MoJ were at an advanced stage. It is still substantially below the indicative value of 505p/share (unchanged) that we calculated as appropriate in the absence of any MoJ revenues during FY17 (see our update note published on 8 February). This calculation assumed that Solid State would be able to deliver modest profits growth without the MoJ work, relying on multiple smaller sources of profits growth rather than a single large contract. The Creasefield transaction highlights the potential for new acquisitions to contribute to profits growth, alongside new product introductions, new franchises and an emphasis on higher margins.