Solid State — Record trading in H120

Solid State (LSE: SOLI)

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Research: Industrials

Solid State — Record trading in H120

Solid State delivered an 11% pro forma increase in group revenues and a 60% jump in adjusted profit before tax during H120. While some of this increase was attributable to factors such as favourable forex, which management expects will reverse in H220, the group is showing a sustainable benefit from the acquisition of Pacer in November 2018 and a drive to higher margin added-value activities in the Manufacturing division. Management is confident of meeting consensus expectations for the year, which are broadly unchanged since the September upgrade. The shares continue to trade at a substantial discount to peers for prospective P/E.

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Industrials

Solid State

Record trading in H120

Technology

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5 December 2019

Price

540p

Market cap

£46m

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Share details

Code

SOLI

Listing

AIM

Shares in issue

8.5m

Business description

Solid State is a high value-add manufacturer and specialist design-in distributor to the electronics industry. It has expertise in industrial/ruggedised computers, electronic components, antennas, microwave systems, secure communications systems and battery-power solutions.

Bull

Added-value design capability supports long-term relationships with customers and higher margins.

Pacer acquisition adds to value-added distribution portfolio with little overlap.

Scale attracts new franchises such as Microchip and VPT.

Bear

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

Shortening in order book visibility caused by market uncertainty.

Delays affecting high value-added manufacturing projects for government-funded and major Infrastructure programmes are commonplace.

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

Solid State is a research client of Edison Investment Research Limited

Solid State delivered an 11% pro forma increase in group revenues and a 60% jump in adjusted profit before tax during H120. While some of this increase was attributable to factors such as favourable forex, which management expects will reverse in H220, the group is showing a sustainable benefit from the acquisition of Pacer in November 2018 and a drive to higher margin added-value activities in the Manufacturing division. Management is confident of meeting consensus expectations for the year, which are broadly unchanged since the September upgrade. The shares continue to trade at a substantial discount to peers for prospective P/E.

Strong performance in first half

Group revenue increased by 43% year-on-year during H120 to £33.6m. This reflects 22% organic growth in the Manufacturing division to £14.1m and the acquisition of Pacer, a value-added distributor of opto-electronic components. Pacer enabled the Value-Added Distribution division to show pro forma like-for-like revenue growth of 4% to £19.5m compared with a 3% decline in the UK distribution sector overall (source AFDEC). Profit before tax, adjusted for share-based payments, amortisation of acquired intangibles and exceptionals rose by 61% to £2.7m, supporting a 25% increase in interim DPS to 5.25p. The operating margin rose by 1.4bp to 7.1%, demonstrating the benefit of operational gearing and the £0.3m forex tailwind, as well as stronger margins in the Manufacturing division which more than offset the anticipated margin dilution from Pacer. The group moved from £2.0m net debt at end FY19 to £0.3m net cash at end H120.

Full year profits likely to be first half weighted

The open order book at the end of October was up 5.3% year-on-year at £37.8m on a like-for-like basis, and current trading so far in H220 has been in line with management expectations. As a result the board is confident of meeting market expectations for FY20, which are broadly unchanged. We note that H120 benefitted from the early completion of some high margin project work in H120 rather than H220 as scheduled and a forex tailwind, which has begun to reverse, so we expect the full-year performance to be first half weighted.

Valuation: Trading at a discount to peers

The share price has risen 14% on the results. Despite this increase, the shares continue to trade on prospective consensus P/E multiples at a substantial discount to the mean for both our sample of specialist manufacturing companies (12.8x for Solid State vs 18.0x for peers) and our sample of value-added distributors (12.8x vs 19.9x).

Consensus estimates

Year
end

Revenue
(£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

03/18

46.3

3.0

30.9

12.0

17.5

2.2

03/19

56.3

3.5

35.9

12.5

15.0

2.3

03/20e

68.0

4.2

42.2

15.2

12.8

2.8

03/21e

70.9

4.4

44.0

16.0

12.3

3.0

Source: Company data, broker consensus. Note: *Adjusted for exceptionals, share-based payments and amortisation of acquisition intangibles.

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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