Expansion of batteries activity

Solid State 1 June 2016 Update

Solid State

Expansion of batteries activity

Acquisition of Creasefield

Tech hardware & equipment

1 June 2016

Price

351p

Market cap

£29m

Net cash (£m) end March 2016 (assuming MoJ settlement received at end FY16)

0.35

Shares in issue

8.4m

Free float

73%

Code

SOLI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

3.2

0.6

(58.1)

Rel (local)

3.0

(1.9)

(53.6)

52-week high/low

922.5p

327.5p

Business description

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

Next events

FY16 results

5 July 2016

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 acquired Creasefield for a maximum consideration of £1.5m. The transaction strengthens Solid State’s existing battery operation. We revise our FY17 revenue estimates, while leaving our profit estimates and indicative valuation of 505p/share unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/14

32.1

2.4

28.5

8.5

12.3

2.4

03/15

36.6

3.2

37.4

12.0

9.4

3.4

03/16e

44.0

3.2

35.4

12.0

9.9

3.4

03/17e

43.6

3.4

36.8

12.0

9.5

3.4

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items including MoJ settlement and share-based payments.

Creasefield complements existing batteries activity

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.

Acquisition earnings enhancing from FY18

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.

Valuation: Acquisition highlights growth potential

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.

Financial summary

Exhibit 1: Financial summary

£000s

2014

2015

2016e

2017e

Year end 31 March

PROFIT & LOSS

Revenue

 

 

32,085

36,559

43,989

43,591

Cost of Sales

(22,729)

(25,396)

(28,328)

(28,744)

Gross Profit

9,357

11,164

15,660

14,848

EBITDA

 

 

2,809

3,766

3,844

3,998

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

 

2,461

3,273

3,297

3,450

Amortisation of acquired intangibles

0

0

0

0

Share-based payments

(235)

(211)

(250)

(250)

Exceptionals

0

0

1,100

0

Operating Profit

2,226

3,062

4,147

3,200

Net Interest

(72)

(48)

(75)

(90)

Profit Before Tax (norm)

 

 

2,389

3,224

3,222

3,360

Profit Before Tax (FRS 3)

 

 

2,154

3,014

4,072

3,110

Tax

(278)

(122)

(365)

(279)

Profit After Tax (norm)

2,111

3,102

2,955

3,081

Profit After Tax (FRS 3)

1,876

2,892

3,707

2,831

Average Number of Shares Outstanding (m)

7.4

8.3

8.4

8.4

EPS - normalised (p)

 

 

28.5

37.4

35.4

36.8

EPS - normalised fully diluted (p)

 

 

28.4

36.3

34.7

36.1

EPS - FRS 3 (p)

 

 

25.3

34.9

44.3

33.8

Dividend per share (p)

8.5

12.0

12.0

12.0

Gross Margin (%)

29.2

30.5

35.6

34.1

EBITDA Margin (%)

8.8

10.3

8.7

9.2

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

7.7

9.0

7.5

7.9

BALANCE SHEET

Fixed Assets

 

 

5,995

6,643

7,974

9,586

Intangible Assets

4,936

5,400

5,845

6,315

Tangible Assets

1,059

1,243

2,128

3,271

Current Assets

 

 

15,744

16,142

21,863

18,916

Stocks

4,575

5,402

6,749

6,330

Debtors

10,484

9,003

10,964

10,759

Cash

685

1,738

4,150

1,828

Current Liabilities

 

 

(10,926)

(10,039)

(10,795)

(7,932)

Creditors including tax, social security and provisions

(7,888)

(5,838)

(6,995)

(6,932)

Short term borrowings

(3,038)

(4,201)

(3,800)

(1,000)

Long Term Liabilities

 

 

(405)

(355)

(355)

(355)

Long term borrowings

0

0

0

0

Other long term liabilities

(405)

(355)

(355)

(355)

Net Assets

 

 

10,407

12,391

18,687

20,215

CASH FLOW

Operating Cash Flow

 

 

2,214

2,680

6,165

4,559

Net Interest

(72)

(48)

(75)

(90)

Tax

(161)

(476)

(476)

(476)

Capital expenditure

(305)

(487)

(800)

(600)

Capitalised product development

(8)

(661)

(270)

(20)

Acquisitions/disposals

(2,323)

0

(731)

(1,890)

Financing

2,618

(308)

0

0

Dividends

(603)

(810)

(1,000)

(1,005)

Net Cash Flow

1,359

(110)

2,813

478

Opening net debt/(cash)

 

 

2,304

2,353

2,463

(350)

HP finance leases initiated

0

0

0

0

Other

1,408

0

0

0

Closing net debt/(cash)

 

 

2,353

2,463

(350)

(828)

Source: Solid State accounts, Edison Investment Research


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