Solid State – solid order books, solid growth, solid prospects, solid upside

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Solid State – solid order books, solid growth, solid prospects, solid upside

Solid State is a niche operator which is putting in a very strong performance and trading on an undemanding valuation, writes Mark Watson-Mitchell. 

I am looking forward to a bullish statement from the Chairman of Solid State (LON:SOLI) at the electronic and electrical equipment suppliers Annual General Meeting on Wednesday 4 September.

The company’s results for the trading year to end-March 2019 were excellent, showing a very solid advance on all fronts. Even though they have risen well over the last year, I still think that the shares offer a lot of upside potential.

Solid State is engaged in the manufacturing of electronic equipment and the distribution of electronic components and materials.

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The company 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, medical and transportation markets.

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 product 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.

Pacer has only been part of the Solid State group since it was acquired in early November last year. Even so, it added some £5.7m to last year’s total revenue of £56.3m. Its activities had little overlap with the rest of the group but without doubt it adds to the value-added distribution portfolio.

On a sales-by-product area basis, computing products represented 21% of turnover, optoelectronic and electronic components made up 54%, communication products was 7% and power products 18% of the total.

On a geographic sales split the UK represented 80% of turnover, the Rest of Europe was 9%, North America 6%, and Asia was 5%.

The year to end-March 2019 saw pre-tax profits jump from £3.0m to £3.7m, with earnings increasing from 30.9p to 35.9p per share. The dividend was boosted from 12p to 12.5p per share.

The group already has a very strong order book for the current year, which should underpin its sales and profits progress.

The 2019/2020 trading year estimates are for a rise in sales to £68.0m, with pre-tax profits of £3.7m, earnings of 36.9p and a dividend of 12.7p per share.

Going forward into the next year sees estimates of £70.5m in revenue, £4.0m of profits, 40.3p of earnings and a thrice covered dividend of 13.5p per share.

The group has 8,532,878 shares in issue, of which the board and key subsidiary Directors own about 22.50% of the equity.

Institutional holders include: Canaccord Genuity (9.95%), Seguro Nominees (8.14%), Charles Stanley (7.78%), Cazenove Capital (7.22%), Cavendish Asset (4.11%), Amati Global (2.39%), and Liontrust Investment Partners (1.79%).

With its shares trading at 404p, the group is only valued at £34.4m, which I rate to be well below that of its peers in the sector. The shares, which were just 270p one year ago, have fallen some 50p since its early July results announcement – a fall which I believe to be overdone.

The group’s own broker, finnCap, has recently increased its target price from 475p to 546p, which would only put the shares out there on a 15 times current year price earnings multiple. I totally agree with the brokers and rate the shares as undervalued.

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