Surface Transforms: Major OEM 10 order, OEM 8 delay resolved

Hardman & Co

Surface Transforms plc (LON:SCE) The 24 November OEM 10 order raised the order book 50%. Even before this, it had quadrupled in under two years. This latest £100m lifetime (six-year) order with OEM 10 is the second order from this US mega-OEM – a major cornerstone. The order book is now £290m. SCE has visibility of the order inflow. It had stated, in the autumn, that a new order would come before end-2022. A major milestone was achieved this half-year, as SCE registered several profitable months. The production ramp-up is very large, and the exciting growth at OEM 8 hit a pocket of air turbulence, knocking that ramp-up a little, affecting 2022 profits, but not 2023.

  • Order book up six-fold in under two years: Three OEMs generate 2023E revenue, five in 2024E. End-sales of these models have waiting lists themselves, which adds visibility too. The models are mid- to upper-mid-market, and Surface Transforms now has minimal exposure at the super-car end, which reduces demand-risk.
  • Growth ramp-up: The growth ramp-up has now taken place. When many businesses are seeing gross margins fall, SCE has not; indeed, we upgrade our 2022 gross margin estimates. But a combination of OEM 8’s further rescheduling and capacity at its fullest pre-2023 expansion has meant a hit to 2022 profits.
  • Numbers change: 1H’22 sales were £2.9m, generating £2.5m losses. We cut our 2H’22E sales of £9.6m to £3.6m. OEM 8’s order remains £100m, but start of production and ramp-up were delayed due to OEM 8 engineering issues. We raise our 2025E sales and profits significantly. Earlier, we raised 2024E EPS by 38%.
  • Risks: SCE states: “The Company has also had its own production challenges, now materially rectified, and whilst they were neither the reason for the [OEM 8] ramp up delay, nor the bulk of the sales shortfall, have limited the Company’s ability to build a finished stock buffer”. A new plant is scheduled to open in 2H’23.
  • Investment case: Surface Transforms is rapidly growing its 10% market share in this fast-growth market. OEM 10 and OEM 8 have both placed several orders, and, while true “game changers”, these have simply fitted into the broader SCE place in the market expansion. 2H’22 saw OEM 9 arrive too. SCE delivers on a global OEM base, margins are robust and production expansion is happening.

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