Solid State’s FY16 results were flattered by an undisclosed sum in settlement of the terminated MoJ contract. This obscures the underlying performance of the rest of the business, which looks in a good position, given the record order book at the year-end, to deliver a modest improvement in underlying profit before tax in FY17. Management expects the recent Creasefield acquisition to generate incremental profit from FY18 and is keen to execute one acquisition each year going forward. Investors still seem unable to look beyond the ups and downs of the MoJ contract. Increased confidence that the group is able to deliver the modest underlying profit growth in our estimates should help move the share price towards our indicative SOTP valuation of 505p/share.
FY16 revenues were in line with our estimates. Reported profit before tax, which was flattered by a one-off payment in settlement of the MoJ contract, was very slightly ahead. The terms of the settlement are confidential, as is usual in this situation, but we believe that the normalised profit before tax estimate shown in our June note, which was similar to the record levels achieved in FY15, is representative of underlying performance for the year.
The group has started the year with a record order book (£17.8m vs £14.4m end FY15 excluding MoJ). This underpins our FY17 estimates, which we leave broadly unchanged. We expect underlying revenues to be similar to FY16, with a small increase in underlying PBT attributable to the cost-savings programme instigated by management as a precaution in H116. The Creasefield acquisition adds an estimated £4.0m revenue in FY17, while neutral at the PBT level. Noting management’s reference to resuming a progressive dividend policy, we revise our FY17 dividend estimate from 12.0p to 12.5p. We also introduce FY18 estimates.
The share price dropped from 525p to 350p in February on the news of the termination of the MoJ contract and has not recovered, despite confirmation of a cash settlement with regards to the MoJ programme and the Creasefield acquisition. Management does not expect Brexit to have a material impact. As the market becomes more confident that Solid State is able to deliver the performance shown in our estimates, the share price should begin to move towards our indicative SOTP valuation of 505p/share (unchanged).