Record adjusted EBIT expected for FY20

Solid State 16 April 2020 QuickView
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Solid State

Record adjusted EBIT expected for FY20

Technology

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16 April 2020

Price

426p

Market cap

£36m

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Share details

Code

SOLI

Listing

AIM

Shares in issue

8.5m

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.

Bull

Added-value design capability supports long-term relationships with customers and higher margins.

Pacer acquisition adds to value-added distribution portfolio with little overlap.

Scale attracts new franchises such as Microchip and VPT.

Bear

Revenue development dependent on OEM customers’ sales and marketing activity.

Shortening in order book visibility caused by market uncertainty.

Delays affecting high value-added manufacturing projects for government-funded and major Infrastructure programmes are commonplace.

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Solid State is a research client of Edison Investment Research Limited

Solid State expects to beat the consensus FY20 adjusted profit before tax estimate, which was upgraded in September, resulting in a further consensus upgrade from £4.2m to £4.5m. All of the group’s four sites in the UK remain operational as it is a critical supplier for customers in the medical, food retail, security, transportation and defence sectors, the balance sheet is strong and management has put cash conservation measures in place to cope with the impact of the COVID-19 pandemic.

Adjusted FY20 EBIT 10% ahead of consensus

Management expects FY20 revenues to be close to the £68m consensus estimate and adjusted profit before tax to be c 10% ahead of the previous estimate of £4.2m (subsequently upgraded to £4.5m). This demonstrates the benefit of the focus on higher margin added-value activities in the Manufacturing division, which has delivered high single-digit organic revenue growth. The Value-Added Distribution division maintained pro forma like-for-like revenues at FY19 levels despite a 7% y-o-y decline in the UK distribution sector overall (source: AFDEC). The group moved from £2.0m net debt at end FY19 to £3.0m net cash at end FY20, of which c £2.5m relates to advance payments which will potentially unwind during FY21. The group also has a £7.5m unused revolving credit facility. Management has not commented on the final dividend, so the consensus FY20 DPS estimate is unchanged.

Critical supplier designation

The open order book at the end of March was up 11% year-on-year at £39.9m, with £34.5m scheduled for delivery in FY21. All of the group’s four manufacturing sites in the UK are currently operational and it holds c 2.5 months stock to reduce supply chain exposure. The group serves customers in the medical, food retail, security, transportation and defence sectors across both divisions and has been advised by them that it has been designated a critical supplier under government’s guidance. However, it is experiencing weaker demand from the commercial aerospace and certain niche industrial sectors and the oil and gas industry. Management expects to see some rescheduling of orders into FY22 and is not providing guidance for the year. The brokers have consequently placed their FY21 estimates under review.

Valuation: Trading at a discount to peers

The shares continue to trade on prospective consensus P/E multiples at a substantial discount to the mean for both our sample of specialist manufacturing companies (9.5x for Solid State vs 14.0x for peers) and our sample of value-added distributors (9.5x vs 20.0x).

Consensus estimates

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/18

46.3

3.0

30.9

12.0

13.8

2.8

03/19

56.3

3.5

35.9

12.5

11.9

2.9

03/20e

68.0

4.5

45.0

15.2

9.5

3.6

03/21e

N/A

N/A

N/A

N/A

N/A

N/A

Source: Company data, broker consensus. Note: *Adjusted for exceptionals, share-based payments and amortisation of acquisition intangibles

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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