Solid State – Three weeks ago its shares collapsed by over 50% on shock news, now 123p, brokers looking for 180p, Interims tomorrow – a Buy?

Never be afraid of taking advantage of lower share prices of companies that you follow when they are suddenly being hit for six by shock announcements.

The market always overreacts to such news that was unexpected, it is a form of protection some might say.

How many times have we seen it before?

A company announces that expectations will suddenly not be met, its shares fall drastically, but that is when the ‘cheap buyers’ strike.

They come in for a ‘quick recovery bounce’ or because the particular company’s value is suddenly out of line with its sector.

Just such a case can be seen with Solid State (LON:SOLI), whose shares collapsed from 220p on Friday 15th November to a low of 102.55p after a Trading Update announcement.

Now at around the 123p level, and ahead of tomorrow’s Interim Results being declared, the question is whether they are too cheap at this price to be ignored.

The Business

Set up in 1971, this Redditch-based group, which floated on AIM in 1996 and has since then grown both organically and through acquisitions, employs some 400 people.

Its products are found around the world, from the ocean floor and into space, ensuring the smooth operation of systems that augment our everyday lives.

Operating with seven production facilities in the UK, and two in the States, including its offices the group has in total some 15 national and international locations.

The group serves a wide range of industries, with a particular focus on defence, energy production, aerospace, environmental, oceanographic, industrial, robotics, medical, life sciences, and transportation.

It is a specialist value-added component supplier and design-in manufacturer of computing, power, and communications products.

Operating through two divisions (Systems and Components) the group thrives on complex engineering challenges, often requiring design-in support and component sourcing.

The company has a core focus on industrial and ruggedised computing, battery power solutions, antennas, secure radio systems, imaging technologies, and electronic components & displays.

The Trading Update

On Thursday 15th November the group issued a Trading Update following receiving news of an expenditure delay regarding certain potential defence orders.

It stated that it had received notice that expenditure on a prominent defence order programme has been paused, pending completion of the UK Government's strategic defence review next summer.

The business is confident that this is a temporary delay and that the expected orders will still be received in due course, however they could well fall outside of the current financial period.

Therefore, the company's performance for the current year will be materially below current consensus expectations.

Understandably, the timing of the strategic defence review will remain uncertain while such delays could well also affect orders and deliveries originally expected in the next trading year.

Management Comment

CEO Gary Marsh stated that:

"There is strong demand for our technology within the Forces, as operatives continue to experience the benefits of the communications equipment previously delivered.

While the current delays in receiving orders are frustrating, our relationships with the Forces and key defence prime contractors underpins our confidence in the Group's position within this sector.

The Board remains optimistic about the medium and long-term outlook for defence spending given the current geopolitical climate.

Aside from this order deferral, the open order book continues to improve across our target markets.”

The Equity

There are some 56.8m shares in issue.

The larger holders include Charles Stanley Investment Management (13.67%), BGF Investment Management (10.34%), Schroder Investment Management (7.42%), Canaccord Genuity Wealth (6.14%), Abrdn Investment Management (6.04%), GPIM (5.17%), Close Asset Management (5.00%), and Hargreaves Lansdown Fund Managers (4.61%).

There are two private holders of note, Gordon Comben (6.36%) and Barbara Marsh (4.84%).

Analyst Views

Analysts David Buxton and Edward Stacey, at Cavendish Capital Markets, reduced their Price Objective for the group’s shares from 324p to 180p.

Their downgraded estimates for the current year to end-March 2025 are for revenues of £123.0m (£163.3m), while adjusted pre-tax profits could fall over 74% to £4.0m (£15.6m), with similar easing in its earnings to 5.0p (20.0p), but with a maintained 4.3p dividend per share.

For next year the analysts see £133.2m sales, £6.0m profits, 7.9p earnings and the same 4.3p dividend.

At Zeus Capital, analysts John Cummins and Charlie Cullen have the same profit estimates for this year and next, while adding that “we believe that Solid State retains a strong position across a number of growing markets, while benefitting from a robust balance sheet position and ongoing positive cash generation.”

David Larkam, at Edison Investment Research, considers that the group’s strong balance sheet will support its growth strategy, which highlights underlying value, albeit it may take until the full-year results or beyond to demonstrate performance is back on track.

In My View

I have followed this group since it came to the market nearly 30 years ago and believe that it has a good spread of activities and products, which will continue to be in demand for years to come.

Nothing in life goes in a straight line, so we must always expect upsets along the way, and that is just the case with Solid State.

The group’s Interims will be announced tomorrow morning, so depending upon the confident statements from CEO Gary Marsh and CFO Peter James, I believe there could well be a chance of the group’s shares, 306p in late July and now 123p, bouncing in reaction.