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GBP105m
Research: Industrials
Solid State’s pre-close trading update notes that group H118 revenues will be c 4% ahead of prior year levels. Moreover, the 64% year-on-year increase in order book at end H119 leads management to believe the group will exceed FY19 market expectations. Consensus EPS estimates have risen by 7.9% and 5.0% for FY19 and FY20 respectively. Despite a favourable response to the news, the shares continue to trade at a significant discount to peers.
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Solid State |
Positive H119 pre-close trading update
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Technology |
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19 October 2018 |
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Solid State is a research client of Edison Investment Research Limited |
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Solid State’s pre-close trading update notes that group H118 revenues will be c 4% ahead of prior year levels. Moreover, the 64% year-on-year increase in order book at end H119 leads management to believe the group will exceed FY19 market expectations. Consensus EPS estimates have risen by 7.9% and 5.0% for FY19 and FY20 respectively. Despite a favourable response to the news, the shares continue to trade at a significant discount to peers.
Strong growth in Value-Added Distribution
Management notes that group H119 revenues will be c £23.5m, ie £1.0m higher than H118. Just over half of group revenues were from the Value-Added Distribution division. While this benefitted from a c £1.0m one-off order and forex tailwinds, a comparison with the £9.5m divisional revenues reported in H118 shows strong underlying growth. The markets served are in good shape and the division is taking market share as a result of its ‘value-add’ proposition and investment in the sales team in FY17. Some low-margin Manufacturing business delivered in H118 was not repeated, resulting in a y-o-y decline in divisional revenues but better gross margin for the division and the group as a whole.
Order book underpins H2 Manufacturing recovery
The order book at end H119 was £29.6m (64% higher than end H218), of which £18.1m is scheduled for delivery during H219. This includes the initial deliveries under the contracts totalling £4.3m for battery packs powering warehouse robots (Manufacturing division) and the $3.2m contract for the provision of VPT’s military grade power supplies (Distribution division). Noting the strong order book, management expects an improved Manufacturing revenue performance in the second half. It also expects additional business from securing the exclusive VPT franchise, which was announced in April. Management is continuing with its initiatives for enhancing margin, for example by ensuring that the pricing is reflective of the value in the product/solution that is being provided.
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 (11.8x for Solid State vs 16.8x for peers) and our sample of value-added distributors (11.8x vs 18.0x). This indicates there is potential for share price upside once the group can demonstrate meaningful profit growth.
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Consensus estimates
Source: Company data, broker consensus. Note: *Adjusted for exceptionals, share-based payments and amortisation of acquisition intangibles. |
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Disclaimer
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Disclaimer
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