Expectations for material contract modified

Solid State 2 November 2015 Update

Solid State

Expectations for material contract modified

Trading update

Industrial support services

2 November 2015

Price

472.5p

Market cap

£40m

Net debt (£m) at end March 2015

2.5

Shares in issue

8.4m

Free float

73%

Code

SOLI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(39.4)

(47.8)

(22.5)

Rel (local)

(42.0)

(45.5)

(23.1)

52-week high/low

€922.50

€560.00

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 event

Interims

24 November 2015

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 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*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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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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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