Last close As at 05/08/2026
GBP1.86
▲ 1.00 (0.54%)
Market capitalisation
GBP105m
Research: Industrials
As flagged in the April trading update, during FY18 Solid State found it more difficult to win communication contracts in the current ‘America first’ environment. The relative lack of this high-margin work dragged on margins, so adjusted profit before tax fell back slightly, even though both divisions delivered double-digit organic sales growth.
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Solid State |
Focusing on value-add to drive margin
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Technology |
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4 July 2018 |
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Solid State is a research client of Edison Investment Research Limited |
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As flagged in the April trading update, during FY18 Solid State found it more difficult to win communication contracts in the current ‘America first’ environment. The relative lack of this high-margin work dragged on margins, so adjusted profit before tax fell back slightly, even though both divisions delivered double-digit organic sales growth.
Double-digit organic revenue growth
Group FY18 revenues rose by 16% y-o-y to £46.3m, slightly ahead of the consensus estimate at £45.3m. Distribution and value-added services revenues grew by 19%. Manufacturing sales rose by 13%, as significant improvements in both power and computing activities more than offset the one-off order for a new portable rail ticket printer, which benefited FY17 and lower-than-expected communications wins. However, while product line margins were maintained, the absence of the high-margin printer business, weaker communications sales and a greater proportion of distribution revenues pulled down group gross margin by 2.5pp to 27.5%. Adjusted profit before tax declined by 4% to £3.0m, also in line with consensus. Cash (there is no debt) fell by £0.3m to £0.6m at the year-end.
Driving margin through ‘value-add’
FY18 has started well, with the order book at end May totalling a record £23.0m (£20.7m May 17), £19.0m of which is for delivery in FY18. Management initiatives instigated in FY17 and FY18 are bearing fruit. For example, the recent £4.3m contract award for battery packs powering warehouse robots builds on investment in a centre of excellence for portable power and energy storage solutions in Crewkerne, and the recent exclusive distribution agreement with VPT highlights the strength of the additional services that the Distribution division offers. Inevitably gross margin will be lower going forward because of the lower proportion of communications work, but management is mitigating this by making selective headcount reductions, closing the Farnborough sales office and refocusing the Manufacturing division on opportunities with a greater level of value-add activity.
Valuation: Trading at a discount to peers
The share price has picked up from the 241p low following the April trading update. At current levels, the shares are trading on prospective consensus P/E multiples that are at a discount to the mean for both our sample of specialist manufacturing companies (12.1x for Solid State vs 17.9x for peers) and our sample of value-added distributors (12.1x vs 19.5x). This indicates there is potential for share price upside once the group is able to demonstrate meaningful profit growth.
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Consensus estimates
Source: Company data, Bloomberg |
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Disclaimer
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Disclaimer
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Research: Industrials
John Laing Group’s (JLG) pre-close statement maintained guidance for FY18 investment commitments and realisations at £250m. The investment pipeline and the market for secondary assets are reported to be “strong” and the portfolio continues to become increasingly diversified geographically. With a strong market background and the financial strength to exploit market opportunities, we see scope for JLG to close the valuation gap to NAV and its peers.