Solid State's (LON:SOLI) pre-close trading update confirms the group is able to deliver good revenue growth without relying on acquisitions. However, it is proving difficult to win communications contracts in the current ‘America first’ environment. Since such contracts typically command much higher margins than other activities, this has depressed FY18 margins to such an extent that management expects FY18 PBT to remain at FY17 levels. After demoting some significant communications prospects to ‘upside’, management expects PBT to decline in FY19 despite continued revenue growth underpinned by a strong order book.
FY18 profit in line, revenues slightly ahead
Management notes that FY18 group revenue is likely to be slightly ahead of market expectations at more than £45.5m, representing c 15% y-o-y growth. Distribution and value-added services delivered c 18% sales growth. Manufacturing sales rose by c 10%, as significant improvements in both power and computing activities more than offset the one-off order for a new portable rail ticket printer, which benefitted FY17 and lower-than-expected communications wins. However, while product line margins were maintained, the absence of the high-margin printer business, lack-lustre communications sales and a greater proportion of distribution revenues has pulled down group gross margin. Management expects group PBT will be in line with market expectations at c £3m, which is similar to FY17.
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