Solid State delivered an 11% pro forma increase in group revenues and a 60% jump in adjusted profit before tax during H120. While some of this increase was attributable to factors such as favourable forex, which management expects will reverse in H220, the group is showing a sustainable benefit from the acquisition of Pacer in November 2018 and a drive to higher margin added-value activities in the Manufacturing division. Management is confident of meeting consensus expectations for the year, which are broadly unchanged since the September upgrade. The shares continue to trade at a substantial discount to peers for prospective P/E.
Group revenue increased by 43% year-on-year during H120 to £33.6m. This reflects 22% organic growth in the Manufacturing division to £14.1m and the acquisition of Pacer, a value-added distributor of opto-electronic components. Pacer enabled the Value-Added Distribution division to show pro forma like-for-like revenue growth of 4% to £19.5m compared with a 3% decline in the UK distribution sector overall (source AFDEC). Profit before tax, adjusted for share-based payments, amortisation of acquired intangibles and exceptionals rose by 61% to £2.7m, supporting a 25% increase in interim DPS to 5.25p. The operating margin rose by 1.4bp to 7.1%, demonstrating the benefit of operational gearing and the £0.3m forex tailwind, as well as stronger margins in the Manufacturing division which more than offset the anticipated margin dilution from Pacer. The group moved from £2.0m net debt at end FY19 to £0.3m net cash at end H120
The open order book at the end of October was up 5.3% year-on-year at £37.8m on a like-for-like basis, and current trading so far in H220 has been in line with management expectations. As a result the board is confident of meeting market expectations for FY20, which are broadly unchanged. We note that H120 benefitted from the early completion of some high margin project work in H120 rather than H220 as scheduled and a forex tailwind, which has begun to reverse, so we expect the full-year performance to be first half weighted.
The share price has risen 14% on the results. Despite this increase, the shares continue to trade on prospective consensus P/E multiples at a substantial discount to the mean for both our sample of specialist manufacturing companies (12.8x for Solid State vs 18.0x for peers) and our sample of value-added distributors (12.8x vs 19.9x).