Solid State, Frontier Developments And The Small Cap Bid Scene?

Solid State (LON:SOLI) – Trusted Technology For Demanding Environments 

At the end of March this year this specialist value-added component supplier and design-in manufacturer of computing, power, and communications products, announced that its trading to the end of March 2024 should show a record year for the year.

The group, which has grown organically and by acquisition, has made three acquisitions in the last three years.

Operating through two main divisions: Systems and Components, the group specialises in complex engineering challenges often requiring design-in support and component sourcing for computing, power, communications, electronic, electro-mechanical and opto-electronic products.

It is a value-added electronics business supplying commercial, industrial and defence markets with durable components, assemblies, manufactured units and power units for use in specialist and harsh environments. 

The £159m capitalised Redditch based company employs some 400 staff across the UK and the US, serving specialist markets with high barriers to entry in the industrial, defence and security, transportation, medical and energy sectors. 

On Tuesday of this week the group announced a $5.1m order for an IOT technology solution for a US customer from a new franchise line supplied by its Components division.

The contract combines hardware and software applications in a value-added industrial application, leveraging off the international capabilities of the group by exporting its UK expertise into the US market.

The customer solution creates smart vending machines by enabling smart billing and intelligent inventory control and management through the combination of an industrial router and cloud-based services.  

The success of this contract demonstrates the strategy of broadening its complementary technology set and its internationalising of the group.

Solid State should be announcing its final results by the end of next month or thereabouts.

Analysts David Buxton and Edward Stacey at Cavendish Capital Markets are attracted to the group’s shares, looking for 1620p in due course, against last night’s closing price of 1400p.

Their estimates for the year to end March 2024 are for an increase in sales from £126.5m to £164.5m, helping to hoist pre-tax profits to £15.0m (£10.8m), generating earnings of 101.0p (80.7p), while lifting the dividend just 1p to 21.0p for the year.

The analysts are now looking for £143.0m of current year sales, with £10.0m profits, 65.7p earnings and a 22.0p dividend per share – however I would expect them to upgrade their estimates as the current year progresses and further business is awarded.

I would not be put off by the low current year expectations – this is a very impressive little group, with a high reputation and operating in some very sensitive areas.

I can certainly understand the broker’s keenness for the group’s shares.

(Profile 15.08.21 @ 404p set a Target Price of 546p*)

Frontier Developments (LON:FDEV) – Better Losses Expected

Three years ago the shares of this innovative games developer were trading at over £32 each, they have since been down to a low of 95p, that was in the middle of last December.

Anyone taking a leap of faith in the shares before last Christmas will already have been stuffing good profits into their wallets, with the shares having touched 309p on Tuesday of this week.

Yesterday they closed at 301p, at which level a fresh load of investor attention has been sparked.

The ground-breaking Cambridge-based videogames group has this week announced a Trading Update for its year to the end of this month, with CEO Jonny Watts stating that:

“I am pleased to announce that our expectations for our financial performance in the current financial year have improved following the excellent reception to Planet Zoo’s arrival on console and a good ongoing performance from our other CMS titles. 

We are making strong progress following the reset of our strategy during 2023 and I’d like to thank our people for their support during a difficult period in Frontier’s thirty-year history.

We look to the future with renewed confidence.”

Analysts Bob Liao and Carl Smith at Zeus Capital have estimates out for the group to report lower sales for the year to end May 2024 of £85.1m (£104.6m), with reported pre-tax losses of £27.9m (loss of £26.5m).

However, they are encouraged enough to suggest that the expected earnings outperformance over the next couple of years, some of which has already been factored into the recent share price strength, could well see subsequent upgrades drive further price strength.

At Shore Capital analyst Katie Cousins retained her ‘Buy’ recommendation on the company’s shares noting that:

“The share price has made an encouraging recovery since the start of the year, up 102%, albeit this is still 60% off its 52-week high.”

She states that the focus on core titles along with cost-cutting initiatives are supporting the profit recovery and now indicates a much better exit run rate than originally expected.

Cousins considers that the £119m capitalised group’s shares are trading on just one times embedded value to sales and as positive trade momentum continues it underpins the potential of a break-even adjusted pre-tax profit potential for full-year 2025.

Over at Liberum Capital their analysts Caspar Erskine and Andrew Ripper are apparently very confident of the group’s recovery potential, upping their Price Objective on the shares from 190p to 360p to accompany their Buy recommendation.

They consider that the group’s IP value is much higher than its market value, while its brands have strength and development capability.

(Profile 01.10.19 @ 1000p set a Target Price of 1500p*)

And Elsewhere…

The Bid Scene in the Small Cap Sector has recently thrown up some very interesting shows of overseas investor interest, while there has also been a pick-up of ‘noseyness’ from UK players.

I noted the withdrawal of the interest of Waterland Private Equity in pursuing any further with its expression of interest in Centaur Media (LON:CAU), which saw the latter’s shares drop over 20% back to 41.5p.

While it appears that there is an absolute mass of interest in what Revolution Bars (LON:RBG) might offer, with some 32 potential suitors expressing interest in the latter’s formal sales process – with my favourite little late night bars group Nightcap (LON:NGHT) being one of them.

It will be very interesting to see just what the outcome will be for the £4m valued RBG (with its shares at 1.6p), especially as it will throw further light upon the undervalued equity of the £9m capitalised NGHT (shares now at just 4p).

(Asterisks * denote that Target Prices have been achieved since Profile publication)