Q1: Surface Transforms have provided a trading update today. Robin, what key points did you note in the update?
A1: This is a brief but positive pre-close update for the year to 30th of December from the company.
The numbers are still quite small, this company is steadily ramping up production so today they’ve reported revenue of £2 million, which was in with our forecast, but pleasingly the cash position at £1.1 million was ahead of our forecast, about £250,000 pounds ahead of our forecast, mainly due to best management of working capital and slightly lower cap ex.
Operationally, the group is fully operational and it has been throughout the COVID crisis and they’re also saying that the pipeline for new and existing customers continues to develop well. Management also say that they believe they will be able to announce new contracts in the next 12 months or so.
Something that is new in this statement, they are now saying that when their factory on Merseyside is fully built out with all its production cells, that it should then generate around £75 million of revenue annually, against £50 million pounds previously. That is due to a growing level of confidence in their pricing policy and also efficiencies.
The company go on to say that they continue to invest in the platform to ensure that it’s better prepared for growth for example, today they’ve announced that they’ve hired a Human Resources Executive for the first time and that person will help manage the expansion of the workforce from currently around 50 employees to probably 80 or 90 employees over the next 18 months.
So, overall, all positive news and the full-year statement is due in May.
Q2: So, with the increased cash balance and the potential revenue increase of £25 million, from £50 million to £75 million, does that mean that you’ll be changing your forecast and valuation in any way?
A2: Well, good question. On our forecasts, this is just the pre-close statement today and quite brief so we’ve decided not to change forecast at the current time but just to remind you for this year 2021, we already assumed that revenue will rise from £2 million, just reported 2020, to £7.3 million for 2021 and also that the company will be EBITDA positive. So, we already assumed quite a healthy uplift in revenue and profits for this year.
Having said that on the valuation, we use the DCF valuation and we take a more medium term view, we have a growing level of confidence in the pipeline and in the ability of this management team to secure new contracts with OEMs. There, we have lifted our medium term valuation to 65p from 57p per share.
Q3: Just talking about the share price, it has traded quite strongly, how would you describe the company in terms of an investment case on the back of that?
A3: I think that’s an interesting point, the share price has been very strong and that has been fully justified in our view.
What I would say is we see Surface Transforms as a disruptor in the market with its leading carbon ceramic disk technology. There’s only one other main competitor, a company called Brembo SGL, and most automotive OEMs require at least a dual sourcing and therefore we think there is a natural market for SCE products.
That should give good underpinning to earnings and our valuation but also beyond that, the company is aiming to produce its discs at highly competitive price points, by historical standards, and therefore that may open up a much wider market for adoption of this technology.
We think the markets, and we’ve written about this in previous research notes, are potentially measured in the billions so I think two points here, I think the near term, as evidenced by this statement today, we’re seeing good steady progress with operations and the pipeline, but looking further out, we think there is potentially a major market opportunity.