Solid State Share Blog – Final Results Year Ended 2019

Solid State has now released their final results for the year ended 2019.

Revenues increased when compared to last year as a £1M decline in communications products revenue and an £833K decrease in power products revenue was more than offset by a £10.7M growth in electronic components and modules revenue and a £1.2M increase in computing products revenue.  There was a £315K beneficial swing to a forex income but depreciation was up £209K, amortisation increased by £545K and other cost of sales grew by £5.8M to give a gross profit £3.6M higher.  Admin expenses also increased ogive an operating profit £406K higher.  An increase in interest was offset by a reduction in tax charges so the profit for the year came in at £2.7M, a growth of £415K year on year.

When compared to the end point of last year, total assets increased by £12.3M driven by a £3.1M growth in cash, a £2.8M increase in inventories, a £2.4M growth in trade receivables, a £1.8M growth in goodwill and a £1.1M increase in other intangible assets.  Total liabilities also increased during the period due to a £5.7M growth in borrowings, a £1.5M increase in trade payables, a £1.3M increase in accruals and a £1.2M growth in contract liabilities.  The end result was a net tangible asset level of £11M, a decline of £842K year on year.

Before movements in working capital, cash profits increased by £1.1M to £4.6M.  There was a cash inflow from working capital and after interest payments increased by £76K and tax payments were up £276K there was a net cash from operations of £4.6M, a growth of £3.2M year on year.  The group spent £600K on property, plant and equipment, £300K on intangible assets and £3.8M on an acquisition, although they recouped £113K from the sale of assets to give a cash outflow of £34K before financing.  They took out a net £4.2M of new borrowings and paid out £1M in dividends which gave a cash flow for the year of £3.1M and a cash level of £3.7M at the year-end.

The pre-tax profit in the Distribution division was £1.7M, a growth of £382K when compared to last year with an organic sales growth of around 25%, gaining market share, although there was some benefit from Brexit stocking in Q4 along with a one-off order for around £1M.  The addition of the VPT franchise to the product portfolio in Q1 had a major impact with sales well ahead of budget.  This product line represents a continuing opportunity for the division with the leading edge indicator of design-in activity showing high levels of activity. 

Following the acquisition of Microsemi by Microchip, the distribution franchise with Microsemi has been extended to include all Microchip products after the year-end.  This provides significant new product lines and opens up an opportunity to sell the extended offering to their customers.  Additionally the Pacer acquisition adds yet more expertise and marketing activity increased towards the end of the year to promote the broader product offering of the enlarged division.  The management of the division remain optimistic about prospects in 2020 and expect it to be another strong year. 

The pre-tax profit in the Manufacturing division was £2.7M, an increase of £332K year on year despite a marginal fall in revenues reflecting a favourable change in mix with a greater proportion of high value added projects.  Within the division they have established three business units – Computing, Power and Communications. 

The Computing business has seen a continued increase in demand for AI and Internet of Things solutions that are image and video centric.  They have secured an important order for a new security accredited product for a UK government client that will deliver revenue in 2020 with additional associated prospects.  During the year they introduced a new series of own brand 19” rack mount servers including entry level and high end chassis solutions with respective features and pricing competitively matched.  In addition they have resolved and delivered some long standing technically challenging military projects that they were committed to deliver against the customers’ requirements, maintaining a strong relationship that will bode well for future co-operation.

In the Power business, they have made some initial sales into the retail technology and medical sectors where they have not been traditionally strong, to complement the oil and gas and aerospace sectors.  Battery cell manufacturers continue to limit the supply of product to third part providers and are extending lead times across the industry in order that they can service the needs of the electric vehicle market. The focus for future growth remains on harsh environment applications where they can add value.  New applications in robotics solutions are being targeted in varied market sectors.

In the communications business, the level of business has fallen over the prior year but they have made significant progress in developing a portfolio of more standard off the shelf antenna products which are underpinning more sustainable revenues to augment the bespoke programmes which the business has traditionally undertaken.  This includes provision of antennas for test and measurement applications within the burgeoning 5G market. 

The radio team has established 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 them to move up the value chain, generating larger contracts.  This year they have made progress in the early stages of developing the pipeline of international opportunities for an integrated communications solution.

The group continued to make investments in inventory, in particular battery cells and processors, to exploit opportunities and mitigate the risks associated with extended lead times, Brexit and the US/China trade dispute.  The closing stock position also reflects the Pacer acquisition. 

In November he group acquired Pacer Technologies for a cash consideration of £3.8M.  The business was established in 1989 to specialise in the distribution and custom design of optoelectonic components, lasers and displays to the OEM market in the medical, military, commercial, industrial and security sectors.  Products include industrial LEDs, lasers, photon detection and counting equipment.  The business has offices in the UK and the US.  During the year Pacer invested in a new value added facility in Weymouth which includes a clean room.

Going forward, the group’s open order book was up 56% on the prior year.  The acquisition of Pacer has been a large contributor to this but like for like the order book was still up 20% which gives the board confidence that they remain on track to deliver in line with expectations.  The macroeconomic environment from the US China trade war to the ongoing Brexit uncertainty present a level of risk, however. 

Current year trading has been ahead of the same period last year but order intake during Q1 has been softer than expected, likely as a result of the unwind of Brexit stocking. The open order book remains solid, however. 

At the current share price the shares are trading on a PE ratio of 15 which falls to 12.6 on next year’s consensus forecast.  After a 4% increase in the dividend, the shares are yielding 2.7% which increases to 2.8% on next year’s forecast.  At the year-end the group had a net debt of £2M compared to a net cash position of £600K at the end of last year.

Overall then this has been a decent year for the group.  Profits were up, although net tangible assets declined.  The operating cash flow improved but no free cash was generated after the acquisition.  The distribution division did well partly due to stock build before Brexit and a large one-off order, although the underlying performance looks good too.  The manufacturing division improved due to a focus on higher margin products.  Going forward, there are plenty of macroeconomic risks and indeed Q1 orders have been soft, although this is thought to be temporary.  The forward PE of 12.6 and yield of 2.8% look about right and I continue to hold.

On the 3rd September the group released a trading update where they stated that as a result of a strong start to the year the board is confident that profits for the year will be significantly ahead of expectations.  Revenue is expected to be in line with forecasts. 

Trading in the first four months has been very strong.  Generally revenues have been in line with budget but there has been an acceleration of certain project work into the first half that had been expected in the second half. 

Gross margins are stronger than expected as a result of a favourable sales mix in the manufacturing division and continuing production efficiencies, Pacer continues to perform ahead of expectations and also the group is expecting to benefit from forex movements in the first half.

On the 24th October the group released a trading update covering the first half of the year.  The record trading performance achieved last year has continued in the first half of this year and the group is on track to deliver full year earnings in line with board expectations.  Group sales are expected to show organic growth of 7.5% despite the heightened macroeconomic uncertainties of recent months.

Gross margins have benefited from £300K of forex tailwinds with underlying group margins having seen a slight improvement over the prior period and the pre-tax profit is expected to be around £2.5M.  The open order book stood at £36.5M at the end of the period compared to £36.2M at the same point of last year. 

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