Surface Transforms: Everything has come together

Hardman & Co

In January, Surface Transforms plc (LON:SCE) secured a £20.0m fund raise, including a £2.0m Open Offer, to support expansion. The bulk of the proceeds are for capital expenditure, supporting well-advanced order enquiries in hand – from existing and new clients. 2020 saw several contract wins, including a new OEM 8. As a direct consequence, we previously doubled our 2022 sales estimates. We are not raising forward estimates until further orders are signed. To be winning such orders shows that these exacting clients embrace SCE’s product, its robust supply chain and manufacturing capability.

  • Encouraging January update pointed to future contracts’ progress: This highlighted increasing importance of “existing customers making use of existing product approvals, for nomination on their future models.” Testing turnaround times are thus mitigated. We note OEM 8 takes capacity utilisation to 60%.
  • Our estimates: Forward estimates only reflect existing contracts, including development work. Gross margins are steady at either side of 70% and further order momentum is encouraging. The trading update had commentary on a markedly more positive view of future pricing on current long-tail contracts.
  • Ever-rising confidence on future order flow: The sales pipeline multiplies. Existing-client OEMs 1, 6, 7, 8 have been identified as having strong likelihood of additional model orders. A new potential OEM 9 client has now also been identified for the foreseeable future and others are being actively pursued.
  • 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 97%-supplied by one, highly profitable player. Single supply was a most anomalous position for an auto OEM market; now SCE also supplies. Thus, the OEM 8 order, while a true “game changer”, simply fitted into the broader expansion of the market and of Surface Transforms in the market. It is coming about on a broad front adding a much broader customer base.


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Hardman & Co

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