Surface Transforms A whole new level of contract winning

Hardman & Co

The most significant of several 2020 contract wins for Surface Transforms plc (LON:SCE) was announced on 14 September, from a new global customer, OEM 8. New order momentum is rising significantly. SCE’s position as one of only two global manufacturers of a new automotive component – carbon ceramic brake discs – is bringing a series of major opportunities. As a consequence of OEM 8, our 2022 sales estimates double. To be winning such orders shows that these exacting clients embrace SCE’s product, its robust supply chain and manufacturing. SCE also provides a £0.4m upgrade on recent sales revenue.

  • SCE is clearly endorsed as a major supplier: With a superior product and OEMs keen to promote a credible newer supplier in SCE, it is well positioned to win a large share in the £200m, carbon ceramic brake disc market, which is set to grow by an order of magnitude. The OEM 8 order is a game changer.
  • Our estimates: Our forward estimates reflect only existing contracts. Gross margins are steady, at either side of 70%, and new sales bring operationally geared returns. This new multi-year £27.5m order takes capacity utilisation to ca.60%. Investment is being made to support future growth.
  • SCE has arrived: This is only just the beginning of top-line growth above market growth. 2019’s success in winning its first OEM orders transformed SCE’s industry-wide visibility. Lead times are over a year on the tests the OEMs undertake, giving good indications of pipeline opportunities.
  • Risks: 2020 revenues have been affected by COVID-19 and, longer term, the macro-industry sales of cars globally may be affected by an economic slowdown or – at the luxury end, germane to SCE – by stock markets. A major revenue increase at SCE leads to a (definable) increase in working capital needs.
  • Investment case: This large market is 99%-supplied by one, highly profitable player. Single supply was a most anomalous position for an auto OEM market; now Surface Transforms also supplies. Thus, the OEM 8 order, while a true “game changer”, simply fits into the broader expansion of the market and of SCE in the market. This has been anticipated for some years. It is coming about on a broad front.
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Surface Transforms plc
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Hardman & Co

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