This innovative little company is a risky play but the potential rewards could be very significant indeed, writes Mark Watson-Mitchell.
On the face of it this company looks to be a real stinker, a total flop, a massive waste of time. Seriously, how can you value a company that just carries on losing money, has minimal sales revenue and needs occasional bouts of fund-raising?
Last year it lost £2.98m on just £1m of sales. The year before, it had a £1.36m income and burnt £2.3m. And this ‘wonder’ stock is today valued at just over £23m – you must be wondering why I am even featuring this company.
However, there is something of a gambler in every investor – someone who always looks for growth and value does get a wild urge at times to take a real risk – it is in us all. So I strongly suggest that you do your own homework and take a deep look at Surface Transforms (LON:SCE). I think that it is going to be an absolute winner.
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The company defines itself as ‘the home of carbon ceramic brakes’ – it is highly innovative, and it has patented its own materials technology for processors for the production of advanced brakes.
On your car you will have carbon ceramic discs which are produced using chopped carbon fibre, while Surface Transforms interweaves continuous carbon fibre to form a 3D multi-directional matrix.
This process creates a much stronger and very durable product that enables it to conduct three times the heat of standard production components, which keeps down the temperature of the brake system while maintaining the consistency of the performance of the brakes.
The company’s unique patented carbon ceramic technology helps to create the ultimate braking performance for road and track: it saves up to 70% less weight than iron brakes; it improves performance in both wet and dry conditions; it is corrosion free; it improves handling and driveability; it gives less noise, vibration and harshness; and, even from cold it gives outstanding performance.
Obviously advanced niche car makers are very aware of what this new technology could offer to their own products. Majors like BMW, Ferrari, Porsche and Aston Martin all know ST’s technology and are already using it on ‘special’ vehicles ahead of developing it further to go into their own production lines.
That latter process really does take some time and develops slowly, but when production starts then the orders will be continuous and very bulky. And that is just what these early stages of investing in Surface Transforms are all about.
Just like we accept the research and development stages of creating brand new drugs and their deliveries and the many millions of pounds that such development burns – then so we must cut ST the same slack.
Not just racing cars, high performance cars or even mega-powered trucks are early stage users; this new product can be used in rail brakes, aircraft brakes, rocket motor systems and even aerospace components and ballistics. Its potential is massive.
It takes time to get such an advanced product any form of acceptance before it is then developed to enter major production lines – but the wait will be beneficial to those investors who are patient.
The company, which was formed way back in 1992 using technologies developed by ICI, went onto the OFEX market in 2000 and two years later joined the AIM market. Its own development has been slow but well formed.
Investors include Unicorn Asset Management (12.4%), Hargreave Hale (11.63%), Barclays Bank Private Banking (2.81%), Hargreaves Lansdown (2.29%) and Maunby Investment Management (2.26%), while directors control some 13.19% of the equity.
From what I see, this company has so many contracts building up that it could well be reporting some very useful numbers within the next two to three years, and further out those numbers could rise exponentially. Until then, it is obviously very risky, and the short-term investment case is dependent on whether or not initial contracts will develop into significant production orders.
The company has recently reorganised its results seasons such that by the end of next year it will be reporting its annual returns to the end of the calendar year, which is also in line with those of its major clients. This year, that is not meaningful, but come 2021, when production starts with several of its customers, then good figures will show through with better force.
I repeat that buying shares in Surface Transforms is extremely speculative, but I get the same buzz about this stock as I did when I spotted a little company called As Seen On Screen (aka ASOS) way back in 2003.
House broker finnCap has a target price of 30p on the shares, which are now just 17p – worth taking a risk?