Solid State has now released their final results for the year ended 2018.
Revenues increased when compared to last year as a £2.6M decline in computing product revenue was more than offset by a £3.8M growth in power product revenue, a £3.2M increase in electronic component and modules revenue and a £1.8M growth in communications product revenue. There was a £296K swing to forex losses but a £75K decline in R&D and a £175K decrease in reorganisation costs which meant that after other cost of sales increased by £5.4M, gross profit was £716K higher. Share based payments increased by £150K, acquisition costs were up £89K and other admin expenses grew by £704K, partly reflecting the full year impact of the Crewkerne and Leominster facilities along with cost inflation, which meant that the operating profit was £222K lower. Tax charges declined by £167K, however, to give a profit for the year of £2.2M, a decline of just £46K year on year.
When compared to the end point of last year, total assets increased by £2.4M driven by a £1.6M growth in trade receivables and a £1.2M increase in inventories. Total liabilities also increased due to a £507K growth in contract liabilities and a £407K increase in other tax and social security payables. The end result was a net tangible asset level of £11.9M, a growth of £1.4M year on year.
Before movements in working capital, cash profits increased by £468K to £3.5M. There was a cash outflow from working capital, however, due to increased lead times on cells and various electronic components, and even after a £218K positive swing to tax receipts, the net cash from operations was £1.4M, a decline of £7.8M year on year. The group spent £402K on fixed assets and £349K on intangible assets to give a free cash flow of £684K which didn’t cover the dividends of £1M so there was a cash outflow of £334k and a cash level of £575K at the year-end.
The profit in the distribution division was £1M, a growth of £148K year on year reflecting the growth in revenue through winning larger volume contracts, albeit in order to win some they had to offer some volume discounts. New initiatives in the prior year began to yield results and are expected to contribute significantly next year.
The profit in the Manufacturing division was £2.2M, broadly flat when compared to last year on billings that were up 13%. Bookings showed growth of just 3%, however, which was below expectations and is expected to result in a slower start to next year.
The computing business unit achieved a stable performance but revenues declined due to £3.5M of non-recurring revenue from the rail sector. Excluding this, and revenues were up 3%. While there was rail sector sales in the current year, the revenue from this sector was significantly down as an initial product rollout finished. These revenues were only partly replaced with sales at a more normalised margin for computer sales resulting in an adverse impact on the performance of the business.
An initial contract has been secured from a new customer in the rail sector. The business will supply them with a suite of computer and monitor equipment that will be integrated into rail coaches to provide video security. Further bookings and revenues are projected for 2019 on this programme. The business has seen an increase in demand for AI solutions that are image/video centric.
The business started delivery of a complex computing solution to the MOD via a major defence contractor. The solution includes TEMPEST products, which is a certification relating to a cyber security accreditation on information systems through preventing leaking emanations such as unintentional radio or electrical signals, sounds and vibrations. Discussions have started with other government departments which also have requirements to protect computer systems installed overseas.
In the Power business unit, they have now completed the transfer of all battery production to Crewkerne and performance continues to improve as they make operational efficiencies. The operation has seen the integration of the latest ISO standard and has approval to build equipment intended for use in potentially explosive atmospheres.
They have continued to see margin pressure on lower value battery solutions and the business is increasingly focused on more complex integrated solutions. There has been a sustained recovery in the oil and gas sector as customers progress through restocking phases to new longer term programmes. New technologies including lithium solutions to service the oil and gas sector present an opportunity for further value added enhancements and the associated margin improvement. Product endurance and reliability are critical to customers given the financial consequences of downhole failure.
The development of a battery solution for a major UK smart warehouse solutions provider has progressed well in the year; initial trials of the pack integrated into the customer’s robotic platform have been successful. After the year-end the business has taken significant production orders from the customer and their robot manufacturer and the production is scheduled to start towards the end of the year. A novel battery reblocking design provides the potential for annuity revenues for extended periods and delivering improved life costs for the end customer.
The business has also secured a further twelve month production contract from an existing customer operating in the aerospace sector. This order reflects an improved commercial relationship as a valued supply partner to the customer.
In the communications business the plans to build the order book for the antenna products is taking more time than the board had expected due to the inability to gain significant traction in North America where US domestic policy has seen the group lose out to US competitors on larger US government funded programmes.
Notwithstanding this, communications revenue was up on last year with strong radio sales and the delivery of a highly complex antenna programme to a major European defence prime contractor. The solution integrates advanced materials, cutting edge antenna design and complex software programming and will open doors to comparable future projects.
During the year the group’s customer, the Met Office, won an award from the Environment Agency with the group’s antenna team being specifically identified as a key supplier of radar antenna technology. The project involved the upgrade of the 16 weather radar systems in the UK National Weather Radar Network.
The radio business delivered two important programmes to the MOD permitting very high bandwidth real time video distribution in the harshest environments. They provided multi input multi output data radios that have the ability to form self-healing mesh networks covering a wide geographic region on land, sea and air and crucially in urban environments. They are now seeing prospective requirements where the proprietary radio solution has been designed into the end user solution.
They have established new business relationships with complementary companies providing mission planning computers, digital mapping solutions and optical sensors positioning the business as a subsystem provider of both the data links and situational awareness product. This will allow this part of the communications business to move up the value chain, generating larger contracts and improved margins.
Lessons have been learned on larger projects to ensure they have been de-risked with appropriate payment milestones against engineering deliverables. Going forward the business will be cautious in predicting significant sales growth from the antenna products. That said, prospects remain good and the business will continue to compete for high margin contracts.
As described above the group have taken a significant production order from a major UK smart warehouse technology solutions provider to supply them with battery packs to power autonomous robots operating in cold conditions. Production is expected to start towards the end of the year. This strengthens the order book increasing board confidence of remaining on track to meet expectations. The business intends to build on this success to expand the group’s capabilities in the provision of power solutions for select autonomous systems operating in harsh environments.
After the year-end the group signed a major exclusive distribution agreement with VPT, a US-based manufacturer of power supplies to the military, aerospace and space industries. The expansion of services in the value added distribution division and in particular the formation of their component sourcing and obsolescence team is starting to deliver a brand new source of recurring revenue to the group which whilst still small, is margin enhancing and has significant growth potential.
As indicated above the communications business has faced several challenges during the year. To address these, they have re-organised the team, and while they do not expect the recovery to deliver material improvements in performance in the coming year, they believe it positions them well for targeting new opportunities.
The group has an open order book of £23M compared to £20.7M at the end of last year and the group finished the year in a strategically stronger position. The management have refocussed the manufacturing division, with an emphasis on new customer lead generation via marketing initiatives and concentration on developing opportunities for higher margin business. The antenna team in the communication business is now seeing an improved level of enquiries, all of which gives the board confidence in the prospects for next year.
At the current share price the shares are trading on a PE ratio of 12.3 which falls to 11.6 on next year’s consensus forecast. After no change in the dividend, the shares are yielding 3.8% which is also forecasted to remain the same next year. At the year-end the group had a net cash position of £600K compared to £900K at the end of last year.
On the 6th September the group released a trading update. There was a positive start to the year which gives the board confidence in their prospects for the year as a whole.
On the 17th October the group released a trading update covering the first half of the year. Revenues will be ahead of last year at around £23.5M reflecting good trading in both divisions. The Distribution division has had a particularly strong period, delivering growth in both revenues and margins. In addition, they benefited from a one-off client order of £1M. The securing of the VPT franchise contract is expected to positively impact H2.
Revenues in the manufacturing division were lower than last year but they have seen an improvement in the gross margin due to sales mix which has ensured consistent group margins compared to last year. Looking forward the strong order book in the power business is expected to result in an improved manufacturing revenue performance in the second half.
Entering the second half, the board considers prospects for the year to be positive and expects the group to exceed market expectations for the current year. The open order book at the period-end stood at £29.6M compared to £18M at the same point of last year.
On the 9th November the group announced the acquisition of Pacer Technologies for a cash consideration of £3.7M. Pacer is well established in the specialist markets of Optoelectronics and displays and the acquisition significantly enhances the group’s exposure to the medical sector. The acquisition is expected to be earnings enhancing in the first full year and it will form part of the distribution division operating as a separate business. Last year the business generated pre-tax profits of £431K and the acquisition generated goodwill of £2.6M so seems pretty good value.
Overall then this has been a bit of a mixed year for the group. Profits were down modestly but net assets improved. The operating cash flow deteriorated but this was due to stock build and cash profits increased. Some free cash was generated but this did not cover the dividend, although it should be noted that cash profits did. The sluggish performance seems to have been due to a lack of rail orders to replace the large projects last year and a difficulty in penetrating the US antenna market.
There have been some good new contracts, such as the batteries for the warehouse company and the VPT contract which are contributing to a record order book. Indeed this year seems to be going quite well and with a forward PE of 11.6 and yield of 3.8% these shares may be worth a buy.