Solid State – solid order books, solid growth and solid upside potential

This group will be announcing its interim results for the six months to end September on 7 December and they should be up to market expectations.

The current year is already looking good.

Furthermore, it is actually able to take advantage of the effects that Covid-19 has had upon its customers.

The business

The Redditch, Worcestershire based Solid State (LON:SOLI) is engaged in the manufacturing of electronic equipment and the distribution of electronic components and materials.

The company, which is over 50 years old, is a high value-add manufacturer and specialist design-in distributor to the electronics industry. It boasts specialist expertise in industrial and ruggedised computing and power solutions.

It acts as both a distributor to original equipment manufacturers and as a manufacturer of specialist units for clients with complex requirements.

The group serves the aerospace, defence, environmental, industrial, oceanographic, government, oil and gas, robotic, medical, life sciences and transportation markets.

It has five principal trading subsidiaries in the UK with one of them having a subsidiary in Indiana in the US. The group employs some 300 staff in both the UK and the US.

Two main operating divisions

On the Manufacturing side, its main company is Steatite, which is a market leader in the design, manufacture and supply of rugged portable and industrial embedded computing systems, custom lithium battery packs, secure communication systems and antennas.

In the Value-Added Distribution division, Solid State Supplies represents a modest number of suppliers who manufacture semiconductors, related electronic components and modules.

This side has particular expertise in high-reliability components for military and aerospace applications. From globally recognised manufacturers the products range includes those for embedded processing, control and communications (both wireless and wired), power management, and LED lighting.

The second part of the Value-Add Distribution division is Pacer Technologies, which is a display design and optoelectronic specialist supplier. Light is the theme that links all of Pacer’s customers, whether in the commercial, industrial, security, medical or military sectors.

Sales splits

On a sales per region basis, of the end March 2021 year’s sales of £66.3m, some 69.9% was derived from UK based customers, while North America was 9.15%, the rest of Europe was 7.35%, Asia was 3.34% with elsewhere just 0.2%.
The divisional split was 58.8% from the Value-Added Supplies side, with the Manufacturing businesses accounting for 41.2%.

The equity is fairly tight

The group has 8,557,878 shares in issue, of which the Board and key subsidiary Directors own about 20% of the equity.
Institutional holders include Schroder Investment Management (9.92%), GPIM (7.50%), Charles Stanley Investment Management (7.78%), Canaccord Genuity Wealth (4.55%), Liontrust Investment Partners (3.99%) and Amati Global Investors (2.21%).

Recent Trading Update

A month ago the group stated that group revenues for the first half would be around £39m (£33.1m), while adjusted pre-tax profits could be around £3.25m (£2.55m).

Those figures will have reflected better underlying trading conditions.

What is very encouraging is the fact that the group as a whole has been enjoying growth in its open order book – that is due to its customers trying to manage their own supply chain challenges by placing larger orders, while also responding generally to post-Pandemic easing pressures.

The order book stood at a record £61.5m as at the end of September, which was up from £51m in May this year.
That also takes order delivery schedules that much further out, which reflects good steady production for the group’s interests over the next two to three years.

Broker’s Views

Analyst David Buxton at the group’s brokers finnCap has current year estimates out for £78m of revenues (£66.3m) with pre-tax profits rising from £5.4m to £5.9m, generating 60.0p (54.7p) of earnings and a dividend of 17p (16p) per share.

Cautiously he goes for £80.7m of sales in the 2023 year to end March, with £6.2m of profits, 59.6p of earnings covering 18p of dividend per share.

Over at WH Ireland their analyst John Cummins sees £78.8m of sales then £81.3m for the 2022 and 2023 years, giving earnings of 59.5p then 58.3p respectively.

My View

Several times over the last couple of years I have restated my positive views of this group’s prospects.

We have done well since the initial profile publication at 404p, so selling half of any holding now would be sensible.

However, the group is a cash generative business while its overall rating is on a par with peers in its sector.

It has the potential to move steadily ahead in order book, sales, profits and earnings as it gently expands its spread of operations both in the UK and internationally.

The share price, at 1185p, is too heavy and is considered to be a deterrent by private investors who always like to own more shares in their portfolio companies – could a scrip issue help to improve marketability?

(Profile 15.08.19 @ 404p set a Target Price of 546p*)

(Asterisks * denote that Target Prices have been achieved subsequent to profile publication)