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Market capitalisation
GBP105m
Research: Industrials
Solid State
Written by
Solid State |
MoJ contract terminated |
Contract update |
Electronic equipment |
26 February 2016 |
Share price performance
Business description
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Solid State is a research client of Edison Investment Research Limited |
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Solid State has unexpectedly announced that the Ministry of Justice (MoJ) has terminated its contract. This has no impact on our FY16 and FY17 estimates, which already took a prudent view with regards to resuming deliveries under the contract. The share price has, in our opinion, overreacted to the news, ignoring the diversified platform that is able to deliver modest profit growth next year despite this negative development.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
03/14 |
32.1 |
2.4 |
28.5 |
8.5 |
18.4 |
1.6 |
03/15 |
36.6 |
3.2 |
37.4 |
12.0 |
14.0 |
2.3 |
03/16e |
44.0 |
3.2 |
35.4 |
12.0 |
14.8 |
2.3 |
03/17e |
39.6 |
3.4 |
36.8 |
12.0 |
14.3 |
2.3 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Diversified platform resilient to contract termination
Our estimates already took a prudent view with regards to resuming deliveries (c £29m outstanding for delivery by end FY18) under the MoJ contract, pushing this out to beyond the end of the forecast period. Our FY16 estimates show the group repeating the record profits achieved in FY15. This is attributable to Ginsbury Electronics, acquired in April 2015, developing new products such as next-generation ticketing equipment and new franchise contracts such as Luminus’ high-value LED lighting and Silicon Labs’ low power radio products which broaden the IoT offer, combined with margin improvement.
FY17 profits growth still achievable
The estimated £5m revenues received from the MoJ during FY15 for the initial phase of the project were at very low margin. Stripping these out, FY17 sales are expected to be in line with FY16 levels as new product introductions should help combat general market weakness. The absence of the initial MoJ revenues is expected to result in a 10% year-on-year revenue decline during FY17e but does not have an adverse impact on expected profitability. In fact, noting the programme could realise c £0.5m annualised cost savings we model a 4% year-on-year rise in adjusted PBT. Management notes that Steatite is to hold discussions with the MoJ regarding the terms on which the relationship will end, suggesting that compensation will be made for terminating the contract. It is likely that management will use cash arising from this to help fund its ongoing acquisition programme.
Valuation: Market reaction too extreme
The scenario analysis in our note published earlier this month concluded that the market had already factored in a modest level of revenues from the MoJ contract during FY17 and calculated an indicative value of 505p/share in the absence of any MoJ revenues during FY17. The share price has fallen substantially below this level in response to the news.
Exhibit 1: Financial summary
£000s |
2014 |
2015 |
2016e |
2017e |
||
Year-end 31 March |
||||||
PROFIT & LOSS |
||||||
Revenue |
|
|
32,085 |
36,559 |
43,989 |
39,591 |
Cost of Sales |
(22,729) |
(25,396) |
(28,328) |
(26,201) |
||
Gross Profit |
9,357 |
11,164 |
15,660 |
13,390 |
||
EBITDA |
|
|
2,809 |
3,766 |
3,844 |
3,997 |
Operating Profit (pre amort. of acq intangibles & SBP) |
|
2,461 |
3,273 |
3,297 |
3,450 |
|
Amortisation of acquired intangibles |
0 |
0 |
0 |
0 |
||
Share-based payments |
(235) |
(211) |
(250) |
(250) |
||
Exceptionals |
0 |
0 |
0 |
0 |
||
Operating Profit |
2,226 |
3,062 |
3,047 |
3,200 |
||
Net Interest |
(72) |
(48) |
(75) |
(90) |
||
Profit Before Tax (norm) |
|
|
2,389 |
3,224 |
3,222 |
3,360 |
Profit Before Tax (FRS 3) |
|
|
2,154 |
3,014 |
2,972 |
3,110 |
Tax |
(278) |
(122) |
(266) |
(279) |
||
Profit After Tax (norm) |
2,111 |
3,102 |
2,955 |
3,081 |
||
Profit After Tax (FRS 3) |
1,876 |
2,892 |
2,705 |
2,831 |
||
Average Number of Shares Outstanding (m) |
7.4 |
8.3 |
8.4 |
8.4 |
||
EPS - normalised (p) |
|
|
28.5 |
37.4 |
35.4 |
36.8 |
EPS - normalised fully diluted (p) |
|
|
28.4 |
36.3 |
34.7 |
36.1 |
EPS - FRS 3 (p) |
|
|
25.3 |
34.9 |
32.4 |
33.8 |
Dividend per share (p) |
8.5 |
12.0 |
12.0 |
12.0 |
||
Gross Margin (%) |
29.2 |
30.5 |
35.6 |
33.8 |
||
EBITDA Margin (%) |
8.8 |
10.3 |
8.7 |
10.1 |
||
Operating Margin (before GW and except.) (%) |
7.7 |
9.0 |
7.5 |
8.7 |
||
BALANCE SHEET |
||||||
Fixed Assets |
|
|
5,995 |
6,643 |
7,974 |
8,046 |
Intangible Assets |
4,936 |
5,400 |
5,845 |
5,615 |
||
Tangible Assets |
1,059 |
1,243 |
2,128 |
2,431 |
||
Current Assets |
|
|
15,744 |
16,142 |
17,663 |
15,620 |
Stocks |
4,575 |
5,402 |
6,207 |
5,586 |
||
Debtors |
10,484 |
9,003 |
10,072 |
9,078 |
||
Cash |
685 |
1,738 |
1,384 |
956 |
||
Current Liabilities |
|
|
(10,926) |
(10,039) |
(10,795) |
(7,296) |
Creditors including tax, social security and provisions |
(7,888) |
(5,838) |
(6,995) |
(6,296) |
||
Short term borrowings |
(3,038) |
(4,201) |
(3,800) |
(1,000) |
||
Long Term Liabilities |
|
|
(405) |
(355) |
(355) |
(355) |
Long term borrowings |
0 |
0 |
0 |
0 |
||
Other long term liabilities |
(405) |
(355) |
(355) |
(355) |
||
Net Assets |
|
|
10,407 |
12,391 |
14,487 |
16,015 |
CASH FLOW |
||||||
Operating Cash Flow |
|
|
2,214 |
2,680 |
3,400 |
4,913 |
Net Interest |
(72) |
(48) |
(75) |
(90) |
||
Tax |
(161) |
(476) |
(476) |
(476) |
||
Capital expenditure |
(305) |
(487) |
(800) |
(600) |
||
Capitalised product development |
(8) |
(661) |
(270) |
(20) |
||
Acquisitions/disposals |
(2,323) |
0 |
(731) |
(350) |
||
Financing |
2,618 |
(308) |
0 |
0 |
||
Dividends |
(603) |
(810) |
(1,000) |
(1,005) |
||
Net Cash Flow |
1,359 |
(110) |
48 |
2,372 |
||
Opening net debt/(cash) |
|
|
2,304 |
2,353 |
2,463 |
2,416 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
||
Other |
1,408 |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
2,353 |
2,463 |
2,416 |
44 |
Source: Edison Investment Research, company accounts
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