Surface Transforms Recent major contract wins transform prospects

Hardman & Co

Surface Transforms‘ results, announced 9 September, were in line with expectations. Since then, ST has secured a further £0.4m revenue, prompting us to upgrade FY19 PBT estimates by £0.25m. Historical results do not reflect a series of substantial new contracts won, post May 2019 year-end, which have transformed the company. It now has multi-year, multi-million, recurring income contracts from Europeanbased global OEMs. Revenue from one commences October 2021, with start of production (SOP) for the other towards the end of calendar 2021. These will support EBITDA-positive (post-tax credit) for 2020 and profitability in 2022.

  • ST’s potential is clearly set: It is set to win a large share in a carbon ceramic brake disc market currently worth ca.£150m p.a., growing fast. It has now won its first major contracts. We consider the addressable market to be £2bn p.a., equating to 4.5m discs, which is (only) near 10% of total European auto sales.
  • Year to May’19: Historical numbers showed a well-flagged revenue fall, largely due to minor delays and demand volatility from aftermarket distributors, all part of the journey to recent contract wins. Our forward estimates only reflect existing contracts. Pre-tests for prospective clients are progressing well.
  • Capacity allocation model: ST’s capacity-in-place is £17m sales p.a. Scope for expansion is significant, and – typical for new automotive components – as volumes rise, production efficiencies also rise. Prices can thus fall, with maintained profit margins, expanding market demand exponentially.
  • Risks: ST has invested ahead of these firm orders and so is well ahead, in terms of capital investment. These contracts benefit from set-pricing and highly predicable timings of off-take, with the start of production date set. Only one competitor exists, and no more are envisaged for many years.
  • Investment case: This is a large, growing market, 99%-supplied by one, highly profitable player. This single supply was a most anomalous position for an auto OEM market – now ST also supplies. June/July contract wins de-risk the business, and both open and expand the target market. The path to Surface Transforms’ discs being designed-in to many more models is clear.


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