Solid State (SOLI) – A solid component of my portfolio

Solid State (SOLI) – A solid component of my portfolio

I invested in Solid State in mid-January and was preparing a write-up for Cube readers when a very positive and welcome trading update released January 30th prompted me to get a move on.

The company has three subsidiaries carrying out high value-added technological activities (latest share price: 417p, market cap £35 million). It is involved in the design, manufacture and distribution to the electronics industry, mainly in the UK but also in the US.

The design element of the business offers integrated solutions to original equipment manufacturers (OEMs). The manufacturing division began back in 1938 and operates in Redditch, Somerset and Hertfordshire.

Trading Update

By the end of the day, SOLI’s shares were up close to 13%, so let’s look at some of the highlights. With only three months of the financial year to go, directors felt confident enough to predict sales “comfortably ahead” and adjusted profits “significantly ahead” of consensus.

Distribution has experienced strong demand while Manufacturing is in line with expectations although admittedly lower than last year.

Gross margin improvements from H1 have continued into H2 and Chief Executive Gary Marsh also states that the order book “gives us confidence in an improved outlook for our financial year ending 31 March 2020”.

Rationale for my initial purchase

I originally bought shares in Solid State because of the positive trading update from November, my review of the numbers and the potential from a £4 million acquisition (“Pacer”) it made last year. Pacer will give the group exposure to the niche medical sector and its US subsidiary should also aid international growth.

Sales growth and gross margin improvements were boosting earnings, and the interim dividend rose 5%.

A quick look at the balance sheet showed that stock and debtors were under control and so no red flags were raised.

Of greater interest was the increased order book. According to the November update it was up 46% thanks to “significant contract wins”.

My current view

The latest update is promising, so if I take the diluted EPS from 2018 of 26p and increase it to 32.5p to reflect the improved performance in H2 and the Pacer acquisition,  take a PE of 14.6 then we could potentially get to 474.5p in the near future, in my opinion.

Last Wednesday’s buying volumes were the largest in a long time. Like other holders, I am hoping that momentum will keep building!

 

At the time of publication, the author has a long position in SOLI.

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