Surface Transforms
Over the next few years Surface Transforms Plc (L:SCEU) 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.
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