Interactive Investor

Upgrade for Solid State may not be the last

24th November 2014 13:31

Lee Wild from interactive investor

Solid State's share price is 20 times higher than it was five years ago. A knack for well-timed acquisitions and highly geared to economic recovery, the maker of hardwearing computers and electronic kit shows few signs of slowing down. In fact, it's even surprised the house broker and earnings forecasts have been shifted higher. A new government contract could mean more to come.

These numbers certainly are impressive. Turnover grew by 39% to £17.1 million, but ditching low margin legacy commercial LED lighting work in favour of more lucrative specialist LED lighting, had operating margin up by 430 basis points at 9.2%, sending pre-tax profit surging 175% to £1.55 million.

Orders have been rolling in, too - £25.3 million during the six months for a book-to-bill ratio of 1.48 to 1 - and the order book currently sits at a record £18.4 million.

Adjusting for share-based payments, profit rocketed by a "stunning" 240% to £1.67 million, according to WH Ireland. And that order book, plus robust outlook for the second half, has convinced the broker to upgrade full-year profit forecasts by 10% to £3.1 million, giving earnings per share of 32.7p.

"The real upside to forecasts today, however, is driven by the dividend which, following a change in cover from 3.0x to 2.5x, increases by 26% this year and 82% next," says analyst Eric Burns who ramps up his target price for Solid State to 763p.

This increase in the payout implies a 3% dividend yield next year and reaffirms Solid State as a yield play, having slipped out of the reckoning following the meteoric rise in its share price.

At 708p, Solid State shares trade on 21.6 times EPS estimates for the year to March 2015. But that drops to a modest 13 times the year after, a discount to electronics peers Telit and Zytronic on 14 times and Dialight on 16 times.

However, even upgraded forecasts could prove conservative if a recently-signed contract with the Ministry of Justice goes well. In July, Solid agreed a three-year contract to supply the government with £34 million of monitoring hardware for GPS offender tagging.

Money is trickling in, but will really take off next year. Yet that £34 million figure was based on estimates for tagging 30,000 offenders. According to government ministers, the figure could rise to 120,000, potentially valuing Solid's contract at up to four times the original figure.

What's more, there has been interest in the technology from a handful of other countries, and also in other applications for things like medical monitoring for dementia patients.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.