Solid State – manufacturing success

Electronic components minnow Solid State joined AIM in 2006. It operates in attractive niche markets but is relatively unknown among investors. However, Solid is a successful UK manufacturing story and operates through three divisions: Solid State Supplies, Steatite and Rugged Systems.

Its end-markets are diverse and span oil and gas production, medical, construction, military and security. With legislation a key driver, much of its demand is being driven by ongoing regulatory developments.

The Solid State Supplies arm is an innovator in LED solutions and is the largest distributor in the industrial computer sector. Supplying a variety of electronic components, it has enjoyed good growth, buoyed by the recent signing of an agreement to become a franchised distributor of semiconductors for CML Microsystems. A restructuring exercise has helped provide a lean cost base, allowing Solid to chase more business.

The Steatite division was one of four acquisitions made during recent years and is the market leader in the supply of battery packs. It also supplies lithium batteries that are integrated into its packs. With end-markets such as oil and gas requiring such devices to work in extreme temperatures (up to 200ºC), there is a great deal of technological know-how.

Steatite recently secured a £1.2 million order from a large defence company for command and control systems. This is the first deal in a two-year agreement, which could lead to further work. The UK lithium battery market is estimated to be worth £250 million, and is expected to be nearer £1 billion by 2020 due to strong demand.

A move to a much larger site in Redditch has boosted efficiencies and provides plenty of latent manufacturing capacity as new orders are secured.

The work is varied and includes the delivery of HD technology to the BBC through to tracking devices used on refuse lorries by Enterprise and even vehicle number plate recognition. Steatite has also developed a rechargeable lithium ion battery pack that can be used with covert surveillance cameras and communications equipment. A trial is currently under way with a major supermarket to increase the battery life for the pickers and packers collating orders from internet shoppers.

Overall trading has improved due to such new product developments, better market penetration and working more closely with customers. The Rugged Systems business operates in Camberley and recently returned to the black after years of losses. Acquired last year, it provides rugged mobile computing solutions that are designed to operate in harsh environments.

After restructuring charges of £153,000, in the six months to September pre-tax profits soared 163 per cent to £550,000 as sales leapt 59 per cent to £10.3 million. Of further interest, the group achieved EPS of 6.5p (as much as for the whole of 2010) and doubled its dividend payout to 2p a share.

The group has more than 800 clients so there is clearly scope for further organic growth. However, it operates in fragmented markets, so the plan is to target further acquisitions of underperforming businesses in the electronics industry.

The current order book stands at a robust £8.8 million, providing good visibility for the year. Recently appointed broker Fox Davies is yet to issue a forecast, but if one assumes a same-again performance for the second half then results due later this month could show a pre-tax profit in the region of £1.1 million and EPS of at least 13p.

For income seekers, Solid State is also likely to reward shareholders with a further rise in the dividend – assuming a 6p payout, this would equate to a 5.7 per cent yield. Trading on little more than eight times 2011 earnings, the rating is derisory for a well-managed business in largely defensive markets. Buy.