Ability to maintain profits confirmed

Solid State 28 April 2016 Flash note

Solid State

Ability to maintain profits confirmed

Pre-close trading update

Electronic equipment

28 April 2016

Price

327.5p

Market cap

£28m

Net debt (£m) end September 2015

4.0

Shares in issue

8.4m

Free float

73%

Code

SOLI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

Business description

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

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 announced that trading results for FY16 at the group’s core businesses should be in line with market expectations. This confirms that it’s diversified platform will deliver another year of results at FY15’s record profit levels, despite general market weakness and the unexpected termination of the Ministry of Justice (MoJ) contract. This strong result excludes compensation for the terminated contract, which we will treat as an exceptional item. The healthy order book at the start of FY17 supports our forecasts showing modest profit growth, so we leave our estimates and indicative valuation of 505p/share unchanged. The dividend (3.7x cover) represents an attractive yield at the current price.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

32.1

2.4

28.5

8.5

11.5

2.6

03/15

36.6

3.2

37.4

12.0

8.8

3.7

03/16e

44.0

3.2

35.4

12.0

9.3

3.7

03/17e

39.6

3.4

36.8

12.0

9.9

3.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, share-based payments

Management’s creation of a diversified platform with focus on value-added capability to driving margins was key to maintaining profits at prior-year levels. The acquisition of Ginsbury Electronics in April 2015, the development of new products such as next-generation ticketing equipment, which have started shipping, and new franchise contracts all contributed to this.

We expect this strategy to deliver modest profit growth during FY17. The FY16 result included an estimated £5m revenues at very low margin for the initial phase of the MoJ project. Stripping this out, we expect FY17 underlying revenues to be similar to FY16, with new product introductions (we note that the group has recently signed up another three distribution franchises) offsetting market weakness. This view is supported by the order book, which totalled £15.3m at end FY16 compared with £14.4m at end FY15. Noting management’s programme to realise c £0.5m annualised cost savings, we model a 4% year-on-year rise in adjusted PBT. It is likely that management will use the cash given in settlement by the MoJ to fund its ongoing acquisition programme, presenting upside to our estimates.

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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

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