As flagged in the April trading update, during FY18 Solid State Plc (LON:SOLI) found it more difficult to win communication contracts in the current ‘America first’ environment. The relative lack of this high-margin work dragged on margins, so adjusted profit before tax fell back slightly, even though both divisions delivered double-digit organic sales growth.
Double-digit organic revenue growth
Group FY18 revenues rose by 16% y-o-y to £46.3m, slightly ahead of the consensus estimate at £45.3m. Distribution and value-added services revenues grew by 19%. Manufacturing sales rose by 13%, as significant improvements in both power and computing activities more than offset the one-off order for a new portable rail ticket printer, which benefited FY17 and lower-than-expected communications wins. However, while product line margins were maintained, the absence of the high-margin printer business, weaker communications sales and a greater proportion of distribution revenues pulled down group gross margin by 2.5pp to 27.5%. Adjusted profit before tax declined by 4% to £3.0m, also in line with consensus. Cash (there is no debt) fell by £0.3m to £0.6m at the year-end.
Driving margin through ‘value-add’
FY18 has started well, with the order book at end May totalling a record £23.0m (£20.7m May 17), £19.0m of which is for delivery in FY18. Management initiatives instigated in FY17 and FY18 are bearing fruit. For example, the recent £4.3m contract award for battery packs powering warehouse robots builds on investment in a centre of excellence for portable power and energy storage solutions in Crewkerne, and the recent exclusive distribution agreement with VPT highlights the strength of the additional services that the Distribution division offers. Inevitably gross margin will be lower going forward because of the lower proportion of communications work, but management is mitigating this by making selective headcount reductions, closing the Farnborough sales office and refocusing the Manufacturing division on opportunities with a greater level of value-add activity.
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