Enhancing R&D capability

Solid State 18 May 2017 Update
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Solid State

Enhancing R&D capability

Site visit

Tech hardware & equipment

 

18 May 2017

Price

420p

Market cap

£36m

Net debt (£m) at end September 2016

0.2

Shares in issue

8.5m

Free float

87.6%

Code

SOLI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.8

(10.6)

22.6

Rel (local)

(0.4)

(13.5)

1.4

52-week high/low

525.0p

292.5p

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 events

Prelims

4 July 2017

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 recently opened a new development, manufacturing and test facility for Steatite Antennas in Leominster, Herefordshire. The 15,000sq ft facility was purpose built to enable the design, manufacture and testing of complex subsystems. Importantly, it houses a near-field RF test chamber able to fit antennas with dish dimensions up to 3m in diameter. The investment in the facility, totalling almost £1m during FY16 and FY17, epitomises the group strategy of adding value through technical expertise.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

03/15

36.6

3.2

37.4

12.0

11.2

2.9

03/16

44.1

4.4**

52.0**

12.0

8.1

2.9

03/17e

39.5

3.1

32.3

12.0

13.0

2.9

03/18e

41.0

3.3

32.8

12.5

12.8

3.0

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments except in FY16. There are no share-based payments in FY17 or FY18. **Including MoJ settlement and other exceptional items.

New facility enables product range expansion

Steatite Antennas, which was acquired by Solid State in 2013, is a specialist in the design and manufacture of ultra-wideband microwave antennas, subsystems and associated microwave components for the broadcast, environmental, industrial, medical, security and defence markets. It offers commercial off-the-shelf (COTS) and customised product, complemented with technical consultancy and in-service support. Around 60% of its revenues are derived from exports, which are facilitated through a network of specialist sales agents. The new facility provides significantly more space, enabling it to construct structures up to 5m tall. It also enables the business to bring environmental test in house, enhancing margins.

New RF test facility accelerates development time

The new near-field RF test chamber will enable Steatite Antennas to test antennas on demand, rather than waiting for the weather to be suitable for testing outdoors or for a slot in an external test facility. The new equipment also provides more detailed information on the transmission or reception characteristics of the antenna. Steatite intends to gain United Kingdom Accreditation Service (UKAS) accreditation for the chamber so that it can be used to perform RF testing on third-party antennas when not required for in-house projects. This will potentially provide a complementary revenue stream for the business.

Valuation: Trading at a discount to peers

Our sum-of-the-parts analysis, which looks at both specialist manufacturing and value-added distribution companies, gives an indicative valuation range of 465-505p/share (previously 390-516p) based on target EV/EBITDA and P/E multiples derived using sector averages of 10.5x and 15.4x respectively. This indicates scope for share price improvement as the market becomes more confident that Solid State is able to grow profits in the absence of the MoJ contract.

Near-field RF test facility

Exhibit 1: Near-field RF test chamber

Source: Steatite

The site relocation has enabled Steatite to construct its own RF test chamber measuring 7m by 5m by 6m high. This replaces outdoor, semi-automated, far-field test ranges that could not be operated during rain because of interference with the radio transmissions and where the results had to be adjusted for reflections from the ground, trees and fences. The new indoor near-field test chamber may be used throughout the year, can accommodate larger dishes and is able to characterise antennas in far greater detail. It operates from 500MHz to 40GHz.

Exhibit 2:Beam pattern measurement from near-field test

Source: Steatite

In addition to the test chamber, Steatite is upgrading the paint spraying and surface coating facilities for finishing items. When fully operational these will be able to handle larger items than previously and give enhanced repeatability for handling larger batches of product. Steatite is also in the process of recommissioning environmental testing kit, which had previously been mothballed. This will enable it to perform pre-compliance and compliance testing to various temperature, vibration and shock standards which previously has been outsourced from external suppliers. The environmental test capability will be used to test products for the entire Steatite group, not just antennas.

Valuation

Exhibit 3: Listed peers

Company

Market cap

Current

EV/Sales (x)

Next

EV/Sales (x)

Current EV/ EBITDA (x)

Next EV/ EBITDA (x)

Current P/E (x)

Next P/E (x)

Arotech Corp

£66m

1.0

0.9

10.8

8.0

16.0

10.3

Cobham

£3,163m

2.1

2.1

14.2

13.3

22.4

20.7

Cohort

£181m

1.3

1.2

10.5

9.6

18.0

14.7

Concurrent Technologies

£68m

3.5

3.4

12.5

11.6

14.6

13.4

Cubic Corp

£935m

1.0

0.9

12.3

9.3

29.3

13.1

Elbit Systems

£3,958m

1.5

1.5

12.7

12.1

20.7

19.1

Kratos Defense& Security Solutions

£629m

1.6

1.6

21.3

15.9

260.6

32.8

Leclanche

£93m

2.1

1.4

-

-

-

-

Rockwell Collins

£13,005m

2.7

2.1

12.2

9.4

17.9

15.2

Stadium Group

£51m

0.9

0.7

7.6

6.6

12.5

10.3

Ultra Electronics Holdings

£1,448m

2.1

2.0

11.0

10.1

14.8

13.9

Mean manufacturing companies

 

1.8

1.6

11.5

10.0

17.1

14.5

Acal

£182m

0.7

0.6

9.7

8.1

13.9

12.2

Diploma

£1,242m

2.8

2.7

15.5

14.7

23.1

21.8

Mean value-added distributors

1.7

1.7

12.6

11.4

18.5

17.0

Solid State at current price of 420p/share*

0.9

0.9

10.1

9.7

13.0

12.8

Source: Bloomberg, Edison Investment Research. Note: *On net debt at end September 2016, as this includes cash from the MoJ settlement, which was received after the FY16 year end. Grey shading indicates exclusion from mean. Prices at 15 May 2017.

A comparison of Solid State’s prospective share price multiples with its listed peers shows it is trading at a discount to both the mean of our sample of manufacturing companies and the mean of our sample of added-value distribution companies on all metrics.

Exhibit 4: Sum-of-the-parts analysis

Year 2 EV/EBITDA (x)

Year 2 P/E (x)

% FY17 profits from Manufacturing

65.5%

% FY17 profits from Distribution

34.5%

Manufacturing multiple

10.0

14.5

Distribution multiple

11.4

17.0

Weighted value

10.5

15.4

Value/share (p)

465

505

Source: Edison Investment Research

Our sum-of-the-parts analysis (Exhibit 4), which is based on the target EV/EBITDA and P/E multiples derived using the peer group averages, gives an indicative valuation ranging from 465p (based on FY18 blended EV/EBITDA of 10.5x) to 505p (based on FY18 blended P/E of 15.4x). The range was previously 390-516p.As we have not adjusted our estimates, this change in range is the consequence of basing the EV/EBITDA calculation on net debt at end September 2016, ie after the cash in settlement from the MoJ had been received, rather than on net debt at end FY16, which was before receipt of the MoJ settlement. The shares are currently trading substantially below the lower bound of this range, indicating scope for share price improvement as the market becomes more confident that Solid State is able to grow profits in the absence of the MoJ contract.

Exhibit 5: Financial summary

£'000

2014

2015

2016

2017e

2018e

Year end 31 March

PROFIT & LOSS

Revenue

 

 

32,085

36,559

44,100

39,468

41,025

Cost of Sales

(22,729)

(25,396)

(30,072)

(28,473)

(29,432)

Gross Profit

9,357

11,164

14,028

10,995

11,593

EBITDA

 

 

2,809

3,766

5,113

3,577

3,721

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

2,461

3,273

4,482

3,170

3,313

Amortisation of acquired intangibles

0

0

0

(200)

(200)

Share-based payments

(235)

(211)

(174)

0

0

Exceptionals

0

0

0

(200)

0

Operating Profit

2,226

3,062

4,308

2,770

3,113

Net Interest

(72)

(48)

(112)

(30)

(10)

Profit Before Tax (norm)

 

 

2,389

3,224

4,370*

3,140

3,303

Profit Before Tax (FRS 3)

 

 

2,154

3,014

4,196

2,740

3,103

Tax

(278)

(122)

(28)

(411)

(528)

Profit After Tax (norm)

2,111

3,102

4,342

2,729

2,776

Profit After Tax (FRS 3)

1,876

2,892

4,168

1,829**

2,576

Average Number of Shares Outstanding (m)

7.4

8.3

8.3

8.4

8.5

EPS - normalised (p)

 

 

28.5

37.4

52.0*

32.3

32.8

EPS - normalised fully diluted (p)

 

 

28.4

36.3

51.2

32.2

32.7

EPS - FRS 3 (p)

 

 

25.3

34.9

49.9

21.7

30.5

Dividend per share (p)

8.5

12.0

12.0

12.0

12.5

Gross Margin (%)

29.2

30.5

31.8

27.9

28.3

EBITDA Margin (%)

8.8

10.3

11.6

9.1

9.1

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

7.7

9.0

10.2

8.0

8.1

BALANCE SHEET

Fixed Assets

 

 

5,995

6,643

6,648

8,401

8,213

Intangible Assets

4,936

5,400

5,283

5,802

5,621

Tangible Assets

1,059

1,243

1,366

2,599

2,593

Current Assets

 

 

15,744

16,142

19,993

15,089

16,577

Stocks

4,575

5,402

5,534

5,623

6,069

Debtors

10,484

9,003

13,465

8,867

9,441

Cash

685

1,738

994

600

1,066

Current Liabilities

 

 

(10,926)

(10,039)

(10,587)

(6,271)

(6,009)

Creditors including tax, social security and provisions

(7,888)

(5,838)

(6,189)

(5,971)

(6,009)

Short term borrowings

(3,038)

(4,201)

(4,398)

(300)

0

Long Term Liabilities

 

 

(405)

(355)

(290)

(290)

(290)

Long term borrowings

0

0

0

0

0

Other long term liabilities

(405)

(355)

(290)

(290)

(290)

Net Assets

 

 

10,407

12,391

15,765

16,929

18,491

CASH FLOW

Operating Cash Flow

 

 

2,214

2,680

1,796

7,870

2,737

Net Interest

(72)

(48)

(112)

(30)

(10)

Tax

(161)

(476)

26

(411)

(528)

Capital expenditure

(305)

(487)

(845)

(800)

(400)

Capitalised product development

(8)

(661)

(36)

(20)

(20)

Acquisitions/disposals

(2,323)

0

(783)***

(1,890)

0

Financing

2,618

(308)

5

0

0

Dividends

(603)

(810)

(991)

(1,015)

(1,014)

Net Cash Flow

1,359

(110)

(941)

3,704

766

Opening net debt/(cash)

 

 

2,304

2,353

2,463

3,404

(300)

HP finance leases initiated

0

0

0

0

0

Other

1,408

0

0

0

0

Closing net debt/(cash)

 

 

2,353

2,463

3,404

(300)

(1,066)

Source: Company accounts, Edison Investment Research. Note: *Including MoJ settlement and other exceptional items. **Including £0.5m loss from Steatite Electronic Monitoring Systems, which is treated as discontinued activity. ***Net of cash acquired with Ginsbury.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. 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 2017 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 2017. “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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. 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 2017 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 2017. “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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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