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Research: Industrials
Solid State has announced that FY17 trading is likely to be broadly in line with market expectations, with delays in antenna projects in Q4 pushing performance to the lower bound of the range. We adjust our estimates slightly downwards and revise our indicative valuation to 390-516p/share. The mean of the lower and upper bounds of our new range is 453p, indicating that Solid State is fairly priced at current levels.
Written by
Solid State |
FY17 trading broadly in line |
Pre-close trading update |
Tech hardware & equipment |
27 March 2017 |
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 announced that FY17 trading is likely to be broadly in line with market expectations, with delays in antenna projects in Q4 pushing performance to the lower bound of the range. We adjust our estimates slightly downwards and revise our indicative valuation to 390-516p/share. The mean of the lower and upper bounds of our new range is 453p, indicating that Solid State is fairly priced at current levels.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
3/15 |
36.6 |
3.2 |
37.4 |
12.0 |
11.7 |
2.7 |
3/16 |
44.1 |
4.4** |
52.0** |
12.0 |
8.4 |
2.7 |
3/17e |
39.5 |
3.1 |
32.3 |
12.0 |
13.6 |
2.7 |
3/18e |
41.0 |
3.3 |
32.8 |
12.5 |
13.4 |
2.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments except in FY16. There are no share-based
payments in FY17 or FY18. **Including MoJ settlement and other exceptional items.
Delays in antennae deliveries standard for industry
Discussion with management indicates that the delays in antennae orders relate to delays in some defence programmes being awarded and in some programmes progressing from pilot phases to more extensive roll-out. This unpredictable order pattern is normal for the industry. We note that rest of the manufacturing business performed broadly in line with management expectations while the distribution business was slightly ahead. Given the limited visibility on when some significant programmes will be delivered, we have cut back our FY18 revenue estimate by 9%, PBT by 6%. We note that management has decided to stop development activity on offender monitoring systems. This unit will be treated as a discontinued activity with attributable losses of c £0.5m in FY16.
Order book strong
Orders at the end of February 2017 totalled £18.1m, compared with £16.5m one year previously. Even though some of these orders are for delivery towards the end of FY18/early FY19 and the prior year’s order book excluded c £1m of Creasefield business, this rise is encouraging.
Valuation: Fairly priced at current levels
Our sum-of-the-parts analysis, which looks at both specialist manufacturing and value-added distribution companies, gives an indicative valuation range of 390-516p/share (previously 445-495p) based on target EV/EBITDA and P/E multiples derived using sector averages of 9.8x and 15.7x respectively. The mean of the lower and upper bounds of our new range is 453p, indicating that Solid State is fairly priced at current levels.
Continued development of value-add capability
Solid State is continuing to pursue its strategy of acquisitions, expansion into complementary industry verticals and development of value-added capability. For example, Steatite is three-quarters of the way through a two-year project to develop a pressure tolerant battery pack for deployment in submarine drones. During the summer of 2017, pressure-tolerant lithium sulphur battery packs developed by Steatite will be integrated into two deep-dive vessels that will be used in full open-water trials. The battery packs will significantly improve operating efficiency by extending the distance the drone can cover during an individual dive. The distribution division (Solid State Supplies) has signed a new agreement with industrial and embedded computing platform designer and manufacturer, AAEON Technology. While the provision of off-the-shelf products will form part of the agreement, Solid State Supplies will significantly enhance the value to customers by delivering customised solutions to meet their individual requirements.
Financials
We modify our estimates to reflect:
■
Delays in antennae programmes during Q417 and the potential for further delays to programmes during FY18, which impacts revenues and profits in both years.
■
A change in FY18e tax-rate from 15% to 17% to reflect lower level of tax credits.
■
The possibility that the minor reduction in earnings may result in a slight reduction in dividend payments as management is keen to conserve cash for further acquisitions.
Exhibit 1: Changes to estimates
2016 |
2017e |
2018e |
|||||
Actual |
Old |
New |
% change |
Old |
New |
% change |
|
Revenue (£m) |
44.1 |
43.6 |
39.5 |
-9.5% |
45.1 |
41.0 |
-9.1% |
EBITDA (£m) |
5.1 |
3.7 |
3.6 |
-2.9% |
3.9 |
3.7 |
-4.9% |
Pre-exceptional PBT (£m) |
4.4 |
3.2 |
3.1 |
-3.3% |
3.5 |
3.3 |
-5.5% |
Normalised EPS (p) |
52.0 |
32.7 |
32.3 |
-1.1% |
35.1 |
32.8 |
-6.6% |
DPS (p) |
12.0 |
12.5 |
12.0 |
-4.0% |
13.0 |
12.5 |
-3.8% |
Source: Edison Investment Research
Valuation
Exhibit 2: Listed peers
Company |
|
Market cap |
Current EV/S |
Next EV/S |
Current EV/ EBITDA |
Next EV/ EBITDA |
Current P/E |
Next P/E |
Arotech Corp |
|
£67m |
1.0x |
- |
11.9x |
- |
15.9x |
- |
Cobham |
|
£2,222m |
1.6x |
1.6x |
10.7x |
10.0x |
18.9x |
16.7x |
Cohort |
|
£179m |
1.3x |
1.2x |
10.4x |
9.5x |
17.9x |
14.6x |
Cubic Corp |
|
£1,165m |
1.1x |
1.0x |
13.2x |
11.1x |
48.3x |
22.4x |
Elbit Systems |
|
£3,916m |
- |
- |
- |
- |
19.7x |
17.8x |
Kratos Defense & Security Solutions |
|
£548m |
1.5x |
1.4x |
19.3x |
14.3x |
1008.8x |
32.5x |
Leclanche |
|
£109m |
4.4x |
2.0x |
- |
804.5x |
- |
- |
Stadium Group |
|
£39m |
0.7x |
0.6x |
5.8x |
5.0x |
9.6x |
7.9x |
Ultra Electronics Holdings |
|
£1,493m |
2.2x |
2.1x |
11.6x |
10.7x |
15.3x |
14.4x |
Mean manufacturing companies |
1.7x |
1.4x |
10.6x |
9.3x |
20.8x |
15.6x |
||
Acal |
|
£154m |
0.6x |
0.5x |
8.5x |
7.1x |
12.0x |
10.4x |
Diploma |
|
£1,201m |
2.8x |
2.7x |
15.1x |
14.5x |
22.5x |
21.3x |
Mean value-added distributors |
1.7x |
1.6x |
11.8x |
10.8x |
17.3x |
15.9x |
||
Stadium at current price of 460p/share |
£39m |
1.1x |
1.0x |
11.8x |
11.4x |
14.2x |
14.0x |
Source: Bloomberg, Edison Investment Research. Note: Grey shading indicates exclusion from mean. Prices at 22 March 2017.
A comparison of Solid State’s prospective share price multiples with its listed peers shows it is trading at a discount to the mean of our sample of manufacturing companies and the mean of our sample of added-value distribution companies with regards to most metrics.
Our sum-of-the-parts analysis (Exhibit 3), which is based on the target EV/EBITDA and P/E multiples derived using the peer group averages, gives an indicative valuation ranging from 390p (based on FY18 blended EV/EBITDA of 9.8x) to 516p (based on FY18 blended P/E of 15.7x). The range was previously 445-495p. The mean of the lower and upper bounds of our new range is 453p, indicating that Solid State is fairly priced at current levels.
Exhibit 3: Sum-of-the-parts analysis
Year 2 EV/EBITDA |
Year 2 PER |
|||
% FY17 profits from Manufacturing |
65.5% |
|||
% FY17 profits from Distribution |
34.5% |
|||
Manufacturing multiple |
9.3x |
15.6x |
||
Distribution multiple |
10.8x |
15.9x |
||
Weighted value |
9.8x |
15.7x |
||
Value/share |
390p |
516p |
Source: Edison Investment Research
Exhibit 4: Financial summary
£'000 |
2014 |
2015 |
2016 |
2017e |
2018e |
||
Year end 31 March |
|||||||
PROFIT & LOSS |
|||||||
Revenue |
|
|
32,085 |
36,559 |
44,100 |
39,468 |
41,025 |
Cost of Sales |
(22,729) |
(25,396) |
(30,072) |
(28,473) |
(29,432) |
||
Gross Profit |
9,357 |
11,164 |
14,028 |
10,995 |
11,593 |
||
EBITDA |
|
|
2,809 |
3,766 |
5,113 |
3,577 |
3,721 |
Operating Profit (pre amort. of acq intangibles & SBP) |
2,461 |
3,273 |
4,482 |
3,170 |
3,313 |
||
Amortisation of acquired intangibles |
0 |
0 |
0 |
(200) |
(200) |
||
Share-based payments |
(235) |
(211) |
(174) |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
(200) |
0 |
||
Operating Profit |
2,226 |
3,062 |
4,308 |
2,770 |
3,113 |
||
Net Interest |
(72) |
(48) |
(112) |
(30) |
(10) |
||
Profit Before Tax (norm) |
|
|
2,389 |
3,224 |
4,370* |
3,140 |
3,303 |
Profit Before Tax (FRS 3) |
|
|
2,154 |
3,014 |
4,196 |
2,740 |
3,103 |
Tax |
(278) |
(122) |
(28) |
(411) |
(528) |
||
Profit After Tax (norm) |
2,111 |
3,102 |
4,342 |
2,729 |
2,776 |
||
Profit After Tax (FRS 3) |
1,876 |
2,892 |
4,168 |
1,829** |
2,576 |
||
Average Number of Shares Outstanding (m) |
7.4 |
8.3 |
8.3 |
8.4 |
8.5 |
||
EPS - normalised (p) |
|
|
28.5 |
37.4 |
52.0* |
32.3 |
32.8 |
EPS - normalised fully diluted (p) |
|
|
28.4 |
36.3 |
51.2* |
32.2 |
32.7 |
EPS - FRS 3 (p) |
|
|
25.3 |
34.9 |
49.9* |
21.7 |
30.5 |
Dividend per share (p) |
8.5 |
12.0 |
12.0 |
12.0 |
12.5 |
||
Gross Margin (%) |
29.2 |
30.5 |
31.8 |
27.9 |
28.3 |
||
EBITDA Margin (%) |
8.8 |
10.3 |
11.6 |
9.1 |
9.1 |
||
Operating Margin (before GW and except.) (%) |
7.7 |
9.0 |
10.2 |
8.0 |
8.1 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
5,995 |
6,643 |
6,648 |
8,401 |
8,213 |
Intangible Assets |
4,936 |
5,400 |
5,283 |
5,802 |
5,621 |
||
Tangible Assets |
1,059 |
1,243 |
1,366 |
2,599 |
2,593 |
||
Current Assets |
|
|
15,744 |
16,142 |
19,993 |
15,089 |
16,577 |
Stocks |
4,575 |
5,402 |
5,534 |
5,623 |
6,069 |
||
Debtors |
10,484 |
9,003 |
13,465 |
8,867 |
9,441 |
||
Cash |
685 |
1,738 |
994 |
600 |
1,066 |
||
Current Liabilities |
|
|
(10,926) |
(10,039) |
(10,587) |
(6,271) |
(6,009) |
Creditors including tax, social security and provisions |
(7,888) |
(5,838) |
(6,189) |
(5,971) |
(6,009) |
||
Short term borrowings |
(3,038) |
(4,201) |
(4,398) |
(300) |
0 |
||
Long Term Liabilities |
|
|
(405) |
(355) |
(290) |
(290) |
(290) |
Long term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(405) |
(355) |
(290) |
(290) |
(290) |
||
Net Assets |
|
|
10,407 |
12,391 |
15,765 |
16,929 |
18,491 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
2,214 |
2,680 |
1,796 |
7,870 |
2,737 |
Net Interest |
(72) |
(48) |
(112) |
(30) |
(10) |
||
Tax |
(161) |
(476) |
26 |
(411) |
(528) |
||
Capital expenditure |
(305) |
(487) |
(845) |
(800) |
(400) |
||
Capitalised product development |
(8) |
(661) |
(36) |
(20) |
(20) |
||
Acquisitions/disposals |
(2,323) |
0 |
(783)*** |
(1,890) |
0 |
||
Financing |
2,618 |
(308) |
5 |
0 |
0 |
||
Dividends |
(603) |
(810) |
(991) |
(1,015) |
(1,014) |
||
Net Cash Flow |
1,359 |
(110) |
(941) |
3,704 |
766 |
||
Opening net debt/(cash) |
|
|
2,304 |
2,353 |
2,463 |
3,404 |
(300) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
1,408 |
0 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
2,353 |
2,463 |
3,404 |
(300) |
(1,066) |
Source: Company accounts, Edison Investment Research. Note: *Including MoJ settlement and other exceptional items. **Including £0.5m loss from Steatite Electronic Monitoring Systems, which is treated as discontinued activity. ***Net of cash acquired with Ginsbury.
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