State-backed Solid State’s solid growth

The £34m agreement was inked last July, after overcharging by G4S (GFS) and Serco (SRP) led to the government barring the outsourcers from the tagging contract. As part of the deal, Solid State will supply and service GPS devices for three years, with a further three-year extension likely. Sales of the tags are on track this year, accounting for the large bump in forecasted revenue and profit (see table). And though a gross margin per tag of around 25 per cent makes the products slightly less profitable than the average 'ruggedised' (durable) hardware Solid State supplies to military, industrial and transport markets, the deal is significant in other ways.

Firstly, the MoJ wants to cover its own cost by generating commission on selling the tags to offender-monitoring agencies around the world, which effectively gives the Aim-traded group the state's full marketing support. While the UK government owns the intellectual property to the device and will take a cut of the revenue, Solid State should do very well from unit sales which are expected to be made above the £1,000 it charges domestically. Requests for quotations (RFQs) have already been received from overseas buyers, supporting the company's claim that the device is the best in the world. Rigorous third-party testing and the MoJ's signature should mitigate the inherent political risk were a faulty tag to lead to a criminal incident.

A further upside to the domestic contract is the potential rollout of tags to the tens of thousands of prisoners released on temporary licence each year. The MoJ is also under serious pressure to reduce a costly and overcrowded prison system, which could involve a wider adoption of the monitoring technology.

Although the MoJ contract is by far its largest deal to date, the company is in numerous other markets. This includes manufacturing batteries for the likes of GE and Halliburton, industrial computers for BAE Systems (BA.) and Synectics (SNX), rugged in-vehicle hardware for Ferrovial (Sp: FER) and portable train ticket machines for ATOS (Fr: ATO), which are being refitted. Collectively, this has resulted in a record order book of £19.4m at the end of May. A key feature of these contracts is a 'design-in' approach to the most complex electronic system requirements of Solid State's customers, which allows the company to focus on guaranteed high-margin markets with high barriers to entry.