Surface Transforms – Definitely Not To Be Stopped

I admit it – I contribute to air pollution.

Driving my car around the country certainly adds to the problem.

Brake dust is a major source of air pollution, and it is becoming an increasingly well-aired subject.

There are more vehicles on the road than ever before, and newer models tend to have more powerful and bigger brakes.

However, I now offer readers the opportunity to participate in the equity of a company that is doing something to help the situation.

Still very much at the early stages of its corporate development, this group early last week announced a very big business boost, which involved it significantly increasing its Order Book.

The Business

This £61m valued Ellesmere Port-based Surface Transforms (LON:SCE)carries out research, designs, develops, manufactures and sells carbon-ceramic products for the brakes market in the UK, Germany, Sweden, the rest of Europe, the US and internationally.

The company offers carbon-ceramic brake discs for automotive and aircraft applications and also provides carbon-ceramic materials for various applications, such as motorsports, military, and other special vehicles.

It is the UK’s only manufacturer of carbon‐ceramic brake discs, and only one of two mainstream carbon-ceramic brake disc companies in the world, serving customers that include major original equipment manufacturers in the global automotive markets. 

Carbon Ceramic Technology

Utilising its proprietary next generation Carbon Ceramic Technology, the company creates lightweight brake discs for high‐performance road and track applications for both internal combustion engine and electric vehicles.

While competitor carbon‐ceramic brake discs use discontinuous chopped carbon fibre, Surface Transforms interweaves continuous carbon fibre to form a 3D matrix, producing a stronger and more durable product with improved heat conductivity compared to competitor products; this reduces the brake system operating temperature, resulting in lighter and longer life components with superior brake performance.

These benefits are in addition to the benefits of all carbon‐ceramic brake discs vs. iron brake discs: weight savings of up to 70%, longer product life, consistent performance, reduced brake pad dust and corrosion free. 

The group’s carbon ceramic brake discs significantly reduce brake pad wear and hence brake pad dust emissions compared to traditional brake discs.

They are also lighter, last longer, do not corrode and cope better with high accelerating, heavy vehicles, making them well-suited for electric vehicles that require brakes which are used less frequently, but need higher energy braking performance, weight reduction and lower brake pad dust emissions.  

The company’s carbon-ceramic materials are used for various applications that require materials that can withstand temperatures of over 2,000 degrees Celsius.

Due to its lightweight construction the material particularly suits motorsport applications.

Its research team is collaborating with innovative automotive suppliers to develop new brake disc technologies that can further reduce brake dust emissions and improve the performance of electric vehicles.

Sales Per Region

Some 44.0% of last year’s sales were made to the United States, 31.7% to the UK, 6.9% to Sweden, 6.8% to Germany, 6.7% to the Rest of Europe, while the Rest of the World accounted for the balance 3.9%.

Current Order Book

The new business awarded last week, which is worth £100m, is from a mainstream customer described as one of the world’s largest automotive OEMs.

The company has been selected a tier one supplier for carbon ceramic brake discs on both axles of a range of new electric vehicles with common axles.

That latest order takes the group’s contracts on hand up to £390m.

The Equity

There are some 241,733,233 shares in issue.

The largest shareholder is investment manager Richard Sneller, with 34,020,000 shares, some 14.07% of the group’s equity.

Other larger private holders include Richard Gledhill, with 15,013,346 shares, 6.21%; Matthew Taylor, Director, 7,410,203 shares, 3.06%: and David Bundred, Chairman, 1,552,626 shares, 0.64%.

Professional holders include Unicorn Asset Management (7.37%), Canaccord Genuity Wealth (6.49%), Janus Henderson Investors UK (4.91%), Chelverton Asset Management (4.14%), Aviva Investors Global Services (0.54%) and Toscafund Asset Management (0.46%).

Broker’s Views

Analyst Robin Byde, at NOMAD and Joint Broker Zeus Capital, has lifted his DCF valuation to 120p a share.

His current year estimates suggest £13.0m (£5.1m) revenues, with adjusted pre-tax losses reducing to £4.5m from £6.0m last year.

For the year to end December 2024 he sees £30.0m sales and a massive swing into £2.4m of profits, worth 1.4p in earnings per share.

As an example of the massive upside for this group, his figures for 2025 are for £40.0m sales and £5.6m profits, generating 2.8p per share in earnings.

Analysts David Buxton and Michael Clifton, at Joint Broker Cavendish Capital, also have a 120p a share Price Objective.

They see £4.7m losses this year and then leaping into £3.1m profits next year, worth 1.5p in earnings.

Analyst Mike Foster at Hardman & Co notes that the automotive brake market is strong, all the more so in SCE’s market of carbon ceramic discs.

He states that the group’s order book since end-2020 is up nearly six-fold and it makes an explicit statement as to supportive customers and prospects for more orders.

This is a strongly R&D-led business and the difficult past nine months show how high are the barriers to competition, while also inflicting a further one year of losses, not anticipated at the beginning of this year.

His estimates for the current year are for £13.0m sales and £5.7m losses.

For next year he looks for £30.0m revenues, £2.5m profits and 1.23p per share in earnings.

The year to end December 2025, Foster reckons, could see £40.0m turnover, with pre-tax profits of £7.6m, worth 3.2p in earnings per share.

My View – Setting A New Target Price

This group has such incredible scale-up ability and prospects, unfortunately they are not as yet being recognised in the group’s share price at the current 23p.

Gradually the brakes on the group’s share price will be released and then my own Price Objective will be left well behind.

I now set a new Target Price of 30p, which I believe will soon be easily achieved.

(Profile 19.09.19 @ 17p set a Target Price of 30p*)

(Profile 08.01.21 @ 50p set a Target Price of 65p*)

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