- First half revenue up 48 per cent to £88.1mn
- Adjusted pre-tax profit up 39 per cent to £7.3mn
- Net debt slashed from £16.1mn to £3.9mn
First-half results from Redditch-based value-added electronics group Solid State (SOLI: 1,340p) benefited from a full six-month contribution from the August 2022 acquisition of California-based battery pack manufacturing business Custom Power. However, organic growth was still eye-catching, with revenue growth of around 35 per cent on a like-for-like basis.
The electronics group supplies commercial, industrial and defence markets with durable components and manufactured units for use in specialist and harsh environments. Specifically, Solid State focuses on industrial and ruggedised computing, displays, battery power packs, communications including antennas and secure radio systems, and imaging technologies.
The uncertain geopolitical environment is playing firmly into its hands by driving increased demand from clients in the defence and security segments, which account for a fifth of current year revenue estimates of £155mn. As a UK-based systems provider, Solid State has relationships with Tier 1 suppliers such as BAE Systems (BA.) and direct exposure to Nato agencies. For instance, the group is supplying £17.1mn-worth of communication equipment to a defence customer as part of Nato procurement contracts. The directors highlight ongoing robust demand from military and security markets.
They also report 9 per cent growth in the order book to £108.6mn since the half-year end which adds weight to expectations of 22 per cent growth in full-year revenue, to £155mn. Moreover, the group has a strong pipeline of contract opportunities as well as a robust pipeline of new design wins across all parts of the business.
It’s also worth noting that Solid State's robust free cash flow generation has slashed debt and analysts forecast a small net cash position in the 2024-25 financial year. The balance sheet strength points to more earnings per share (EPS) accretive acquisitions being made in due course.
Rated on 11 times operating profit estimates of £14mn to enterprise valuation of £155mn, and on a price/earnings (PE) ratio of 15.6, the rating is modest for a business that should deliver both a mid-teens return on capital employed (ROCE) and post-tax return on equity in the current financial year.
Offering a further 26 per cent upside to the 1,700p target I outlined when I initiated coverage (Alpha Research: An overlooked share to benefit from rising defence spending’, 20 July 2023), the shares rate a buy.
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