Surface Transforms — Update 8 December 2015

Surface Transforms — Update 8 December 2015

Surface Transforms

Andy Chambers

Written by

Andy Chambers

Director, Industrials

Surface Transforms

Strong braking performance

Automotive equipment

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8 December 2015

Price

23.0p

Market cap

£12m

Share price graph

Share details

Code

SCE

Listing

AIM

Shares in issue

53.2m

Business description

Based in Ellesmere Port, Surface Transforms is developing new technology carbon ceramic brake discs (Carbon Silicon Carbide – CSiC) for use in automotive and aerospace applications.

Bull

A unique process has attracted direct interest of leading performance car manufacturers.

Potential to break the existing monopoly in automotive carbon ceramic brake discs.

Potential through the market-leading supplier of aerospace brakes for lighter aircraft for carbon disc applications.

Bear

Significant investment required to further industrialise processes and build factory.

Automotive game change contracts remain unconfirmed, although lead times are shortening.

Substantial competitor in BSCCB.

Analysts

Andy Chambers

+44 (0)20 3681 2525

Roger Johnston

+44 (0)20 3077 5722

Over the next few years Surface Transforms (ST) should transition from development and niche supply of carbon ceramic brake discs to a full volume producer. Its pre-close trading update indicates good operational progress, although the game-changing automotive contracts still remain unconfirmed. If the company successfully delivers these and funds its expansion, the potential looks significant.

Positive H1 progression

Surface Transforms released a trading statement for the six months to November 2015 indicating good progress. Sales increased by 26% to £782k in the six months, with EBITDA loss including the R&D tax credit reduced from £165k in H115. Improvements in both aerospace sales and ongoing automotive markets (retrofit +60% and near OEM +20%) of around £100k were apparent. H1 sales were further boosted by a catch-up of volumes deferred from H215 due to a furnace breakdown. Net cash flow was negative by £306k during the period, although net current assets increased by £266k, most of which should convert to cash in H2. Management believes this indicates the company is close to cash break even, and has stated that it expects to meet market expectations for the full year.

Game-changers edging closer

The military aerospace contract continues to track to plan, with full delivery volumes expected in 2018 and likely to generate revenues of £1.3m. However, the five automotive OEM 'game changer' contracts remain unconfirmed. At its recent AGM, management indicated that these continue to progress, with the first likely to enter production in 2018. By implication, ST needs to invest in higher capacity soon, to be ready to meet these timeframes. ST is seeking to become an alternate supplier of carbon ceramic brake discs for both the car and the aero markets. Success with the auto contracts would break the monopoly currently enjoyed by Brembo SGL Carbon Ceramic Brakes (BSCCB), a joint venture that has enjoyed rapid growth as acceptance of carbon ceramic brakes in luxury performance cars increases. In the long term, cost reduction should allow ST to penetrate the premium car segment, while the partner prime in aero offers access to light civil aircraft markets.

Valuation: Waiting on volume progression

With an EV of c £12m, ST remains a developing situation with significant future financing requirements. As the contracts translate into real activity, we expect to see substantial increases in contributions and cash flows over the next few years.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

05/14

1.27

(0.84)

(1.65)

0.0

N/A

N/A

05/15

1.07

(0.98)

(1.65)

0.0

N/A

N/A

05/16e

1.40

(0.90)

(1.20)

0.0

N/A

N/A

05/17e

2.00

(0.50)

(0.30)

0.0

N/A

N/A

Source: Company reports, Thomson Reuters

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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