Surface Transforms — Update 23 March 2016

Surface Transforms — Update 23 March 2016

Surface Transforms

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Surface Transforms

Braking news

Automotive

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23 March 2016

Price

18.38p

Market cap

£10m

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Share details

Code

SCE LN

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

The 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

Further significant investment required to increase capacity once new factory is complete

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

While developing innovative carbon ceramic brake discs for the automotive and aerospace industries, Surface Transforms is accelerating towards full industrialisation. The announcement of successful fundraising of up to £5m allows it to build and equip a new factory to supply the initial automotive OE contracts it is increasingly confident of winning. These form the foundation for a full assault on huge potential markets.

Fundraising facilitates capacity build

Surface Transforms announced a fundraising of up to £5m via a placing of 28.125m shares and an open offer of a further 3.125m shares, both at 16p. An existing loan facility of £400k is being repaid by the issue of a further 2.5m shares. The funds enable the company to build and equip a new factory in Knowsley, for which £0.6m of associated financing is available. The capacity when fully commissioned in 2019 should be 17,000 brake discs a year, supporting sales of up to c. £15m.

Positioned to break a monopoly

With several original equipment manufacturer (OEM) auto contracts nearing signature, the company is well positioned to offer a second source of carbon ceramic brake discs to the automotive industry. This will break the monopoly supply position of Brembo SGL Carbons Ceramic Brakes (BSCCB) , which has been enjoying strong growth in demand. The first two automotive contract announcements are expected before the end of the year and are expected to require initial volumes in mid-2018, just as the existing US military aerospace programme enters its production phase. One of these is for a German OEM with revenue potential of £4m in 2019, and the other is British with initial 2019 revenue expected at £1.6m, which should grow with subsequent model launches. As the volume builds in the new factory, we would expect to see the unit cost of production fall significantly, which should open even larger and broader addressable markets in the premium brand sector for cars priced above £50k. This would be worth multiples of the initially targeted high performance auto OE markets.

Valuation: Should improve as risk reduces

The positive development of the investment proposition should be further enhanced as the new factory is built. Risk levels should reduce as the company moves into volume production with positive cash generation. In turn this should release both earnings related and cash-flow based ratings.

Consensus estimates

Year
end

Revenue
(£m)

PBT
(£m)

EPS
(p)

DPS
(p)

P/E
(x)

Yield
(%)

05/14

1.27

(0.8)

(1.6)

0.0

N/A

N/A

05/15

1.07

(1.0)

(1.6)

0.0

N/A

N/A

05/16e

1.40

(0.9)

(1.1)

0.0

N/A

N/A

05/17e

1.80

(1.0)

(1.0)

0.0

N/A

N/A

Source: Company reports, Bloomberg

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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

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New Zealand

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

Research: TMT

CREALOGIX — Update 23 March 2016

CREALOGIX

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