Solid State Plc (LON:SOLI) has announced that FY19 results will comfortably exceed previous market expectations on the back of continued strong demand in the Value Added Distribution division and the anticipated recovery in the Manufacturing division materializing. Consensus revenue estimates have risen by 3% and 5% for FY19 and FY20 respectively, and PBT estimates by 25% and 21%. While the share price has responded positively to the news, the shares continue to trade at a substantial discount to peers.
Strong growth in value-added distribution continues
The strong (13% y-o-y) underlying growth in the Value Added Distribution division noted at the interims has continued into the second half. This is the result of investment two years ago in the sales team, combined with the selective expansion of the product portfolio. For example, securing the exclusive VPT franchise, which was announced in April 2018, was key to winning a $3.2m contract for the provision of military-grade power supplies. The integration of Pacer Technologies, which was acquired in November 2018 and added optoelectronic components to the product offer, is progressing well.
H2 manufacturing recovery realized
At the interim stage, management predicted an improved manufacturing revenue performance in the second half based on a group order book at end September that was £29.6m (64% higher than September 2018), of which £18.1m was scheduled for delivery in H219. This improvement has materialized as the division has made the initial deliveries under the contracts totaling £4.3m for battery packs powering warehouse robots and resolved a technical challenge on a high value-added contract enabling product shipment. Importantly, the shift towards higher-margin work, which delivered a 70bp improvement in group gross margin at the interim stage, has been maintained.
Valuation: Trading at a discount to peers
We estimate that c £0.3m of FY19 profits growth is attributable to one-off effects such as FX. Stripping out these one-off effects demonstrates that the group is achieving meaningful year-on-year profits growth, with scope for FY20 upgrades potentially coming from leveraging the Pacer integration and manufacturing contracts. The share price has jumped by 13% on the consensus upgrades. Even so, 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 (10.4x for Solid State vs 17.1x for peers) and our sample of value-added distributors (10.4x vs 14.9x).
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.
Bull
Added-value design capability supports long-term relationships with customers and supports higher margins.
Military and aerospace expertise helped win VPT power conversion solutions franchise.
Pacer acquisition adds to value-added distribution portfolio with little overlap.
Bear
Delays affecting high value-added manufacturing projects for government-funded and major Infrastructure programmes are commonplace.
Revenue development is dependent on OEM customers’ sales and marketing activity.
Interest on loan to fund Pacer transaction a drag on profits.