Solid State reports record year as it flags Covid uncertainty

Computing, power and communication products manufacturer Solid State updated the market on its trading on Wednesday, saying it was expecting revenue close to the consensus forecast of £68m, with adjusted profit before tax anticipated to be about 10% ahead of current consensus expectations of £4.2m, making a record year for the group.

The AIM-traded firm said that during the second half, it had continued the successful integration of Pacer, with the consolidation of the two Pacer offices into one new office in Pangbourne.

Year-on-year, it said the UK distribution market had declined 7%, according to industry association AFDEC, but despite that, proforma revenue in the company’s value-added distribution (VAD) division had “significantly outperformed” the market, being broadly flat year-on-year.

It said its manufacturing division had delivered “high” single digit organic growth at “good” margins, which helped to drive record profits.

Net cash at 31 March stood at around £3m, as a result of continued strong cash generation and proactive cash management with clients and suppliers, and was a swing from net debt of £2m a year earlier.

Cash generation had also benefited from a number of advanced payments totalling around £2.5m, which would unwind across the course of the 2021 financial year.

The company said its open order book at year-end was up 11% at £39.9m, with the firm adding that it had about £34.5m of orders scheduled for delivery in the coming year.

However, amid the current Covid-19 coronavirus pandemic, it said it was expecting to see “some rescheduling” of orders from the current financial year into the next.

The firm said its four manufacturing sites were open and operating effectively, and adhering to best practice guidelines on social distancing and hygiene protocols.

In terms of risk mitigation, the board said all measures were in place to ensure that there was limited risk of cross-contamination within the business, and where possible, staff were working from home.

Solid State said the pandemic was affecting the business in “contrasting ways”, explaining that it had been notified by numerous customers in both its manufacturing and VAD divisions that it had been designated a “critical supplier” under the government's critical industries and key workers guidance.

Sectors highlighting that dependency included medical, food retail, security, transportation and defence.

Conversely, on the weaker side, the group said it was experiencing softness in demand for batteries for the commercial aerospace market, and in computing products for certain niche applications in the industrial sector.

Separately, owing to the fall in oil prices, it was currently experiencing lower levels of orders for battery packs from the oil and gas industry.

The group said it was continuing to hold “relatively high” levels of stock to limit its exposure to supply chain volatility, explaining that at present, it was holding about 10 weeks worth of stock.

It reiterated that it had net cash of £3m at 31 March, and had a renewed and unutilised revolving credit facility with its bank of £7.5m.

The board said it had taken measures to ensure cash conservation in the short-term, including a recruitment freeze, a salary increase freeze for all directors and staff, delayed payment of accrued bonuses for the 2020 financial year for all directors and staff, the adoption of available deferrals for VAT and PAYE payments to HMRC, and the furloughing of some staff under the Coronavirus Job Retention Scheme.

Solid State said its acquisition strategy had been suspended temporarily, although communication was continuing with prospective acquisitions, with limited progress expected in the short term.

New planned capital expenditure had been suspended, including in new EMC test equipment for manufacturing, although ongoing projects around ERP system upgrades were continuing.

The board said it was taking “prudent steps” to mitigate and manage its cash flow and cost base to withstand the near-term uncertainty.

Looking ahead, the board said it considered that in the current circumstances, it was difficult to provide guidance as to the future performance of the group, which would remain the case until there was “more meaningful visibility” over customer order schedules and broader market conditions.

It said it expected to provide a further update ahead of the full-year results.

“We are very happy with the performance of the business in the past year and consider that it demonstrates the cash generative nature of the business model despite the macroeconomic and political uncertainties which became defining characteristics of the period,” said chief executive officer Gary Marsh.

“The last two months have presented challenges previously unseen.

“That said, the board is optimistic that the structure of the group and the diversity of its exposure to differing product groups and industrial sectors puts it in a relatively resilient position to navigate the challenges of the Covid-19 outbreak.”

Marsh said the company was “not complacent”, and would respond accordingly to the changing pressures and opportunities where appropriate.

“Our staff have risen to the challenge presented by Covid-19 admirably and we would like to acknowledge their dedication and commitment.”

At 1125 BST, shares in Solid State were up 2.22% at 460p.