Solid State |
Expectations for material contract modified |
Trading update |
Industrial support services |
2 November 2015 |
Share price performance
Business description
Next event
Analysts
Solid State is a research client of Edison Investment Research Limited |
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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* |
EPS* |
DPS |
P/E |
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
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