Solid State — Strong organic development in H124

Solid State (LSE: SOLI)

Last close As at 04/03/2024

GBP12.45

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Market capitalisation

GBP141m

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Research: Industrials

Solid State — Strong organic development in H124

Solid State has made an excellent start to FY24 with strong continuing organic growth in H124 enhanced by a full period contribution from Custom Power. As a result, management anticipates better-than-expected revenues and PBT for the full year with market consensus rising by c 5% to £155m and £12.5m, respectively.

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Solid State_resized

Industrials

Solid State

Strong organic development in H124

Industrials

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31 October 2023

Price

1,165p

Market cap

£132m

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Share details

Code

SOLI

Listing

AIM

Shares in issue

11.3m

Business description

Solid State is a specialist value-added component supplier and design-in manufacturer of computing, power and communications products. It supplies the commercial, industrial and military markets with durable components, assemblies and manufactured units for use in specialist and harsh environments. Solid State is a specialist value-added component supplier and design-in manufacturer of computing, power and communications products. It supplies the commercial, industrial and military markets with durable components, assemblies and manufactured units for use in specialist and harsh environments.

Bull

Ambition to deliver a CAGR of 20% in TSR to 2030 supported by targeted 17% CAGR revenue with adjusted operating margin of 12%.

Sustainable growth strategy driven by organic investment and strategic M&A with a good track record of identifying and integrating acquisitions.

Added-value design capability supports long-term customer relationships and higher margins with core competence in computer power and communications serving growing markets.

Bear

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

Some potential for customer destocking as supply chain confidence improves.

Inflation challenges need navigating and order book may shorten as ordering cycles normalise.

Analysts

Andy Chambers

+44 (0)20 3077 5700

Natalya Davies

+44 (0)20 3077 5700

Solid State is a research client of Edison Investment Research Limited

Solid State has made an excellent start to FY24 with strong continuing organic growth in H124 enhanced by a full period contribution from Custom Power. As a result, management anticipates better-than-expected revenues and PBT for the full year with market consensus rising by c 5% to £155m and £12.5m, respectively.

Defence and security demand remains strong

H124 revenues were up by 48% at £88.0m (H123: £59.4m), or by over 35% on an organic basis. Custom Power was consolidated for the full period compared to just two months in H123, adding revenues which more than offset the FX headwind of just over £1m in H124, although this was lower than expected due to a more favourable outturn ($1.26/£) than management had used for guidance at the start of the year ($1.30/£). The revenue growth was primarily driven by £23m of shipments for the large NATO contract signed in November 2022, enhanced by follow-ons. These were at lower-than-normal EBITDA margins, but still mid-20s, which supported a 67% increase in PBT to in excess of £7.0m (H123: £4.2m). The resultant strong cash generation allowed the company to settle the outstanding deferred acquisition considerations of £5.7m and still pay down debt.

FY24 expectations increased again

While the company still faces challenges in the remainder of FY24, the strong start has led management to anticipate a better-than-expected outcome for the year, and market consensus for revenue and PBT have both increased by around 5%. The expectation is supported by around £60m of the £99m order backlog at the half year due for delivery in H224, providing 90% cover for revised H224 market consensus revenue expectations. Management also appears to remain on target to reduce FY24 net debt to around £3.0m (FY23: £8.1m). Clearly H224 consensus revenue is expected to be lower than H124 in the absence of the NATO contract and flat on H223, with potential for ongoing headwinds from FX and customer stock normalisation. Clients are managing down inventories as finance costs increase and supply chain issues ease, and this is expected to continue through H224. FY25 consensus expectations currently remain unchanged.

Valuation: Targeting 20% CAGR in TSR to 2030

Despite the recent share price decline, Solid State’s FY25 P/E discount against its peers has modestly fallen to around 15%. The economic and market challenges are deferring progress to the ambition of 20% CAGR in TSR by 2030, supported by a target of 17% CAGR in sales with 12% adjusted operating margins.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/22

85.0

7.2

70.6

19.5

16.5

1.7

03/23

126.5

10.8

80.7

20.0

14.4

1.7

03/24e

155.3

12.5

85.3

21.0

13.7

1.8

03/25e

152.3

12.5

83.2

22.0

14.0

1.9

Source: Company reports, broker consensus estimates

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. Where Edison has used consensus estimates within this publication, we do not guarantee their accuracy or completeness.

Exclusion of liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2023 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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