Solid State — Update 25 February 2016

Solid State (LSE: SOLI)

Last close As at 23/11/2024

GBP1.18

−4.50 (−3.69%)

Market capitalisation

GBP68m

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Research: Industrials

Solid State — Update 25 February 2016

Solid State

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Industrials

Solid State

MoJ contract terminated

Contract update

Electronic equipment

26 February 2016

Price

525p

Market cap

£44m

Net debt (£m) at end September 2015

4.0

Shares in issue

8.4m

Free float

73%

Code

SOLI

Primary exchange

AIM

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(3.7)

14.8

(29.8)

Rel (local)

(3.2)

22.4

(18.5)

52-week high/low

922.5p

390p

Business description

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

Next event

Prelims

July 2016

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Solid State is a research client of Edison Investment Research Limited

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*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

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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Schumannstrasse 34b

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Germany

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280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

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US

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Level 25, Aurora Place

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