Surface Transforms plc (LON:SCE) final results were announced on 17 April, together with 1Q’23 sales and an update on the now rectified major production hiccough. In November 2022, SCE announced a second OEM 10 contract, the largest for SCE to date. The forward pipeline has been replenished and remains the same. The OEM 10 order commences in 2025, which is normal visibility. OEM 8 comprises the large majority of 2023 and 2024 revenue and was scheduled for a rapid 2022 start of production, but OEM 8 requested a few months’ pause. It has now commenced. SCE’s resolution to the production problem comes after half a year’s disruption in this major growth story.
- 2022 results: Revenue of £5.12m was more than twice 2021 but well below earlier estimates. SCE flagged this disappointment in November 2022 after problems were encountered during October’s planned major rise in production volumes. Cash and the funds for the expansion programme are on track.
- How we got here: The proof-of-performance has come from a combination of OEM trials, which take many years, and on-road excellence. Commissioning issues have provided evidence of the manufacturing processes’ complexities. These two factors provide high and multi-year hurdles to new competition.
- Where we are going: There is only one – larger – competitor, BremboSGL. SCE now has fully operational equipment for £20m capacity, taking share in a rapid-growth market. Hard lessons learnt from the high-quantum scale-up assist the next phase to £50m p.a. capacity, for which equipment is now arriving.
- Risks: This is a rapidly growing market, readily accommodating growth for both suppliers. A major sales increase leads to a (definable) rise in working capital needs. We reiterate what we wrote a year ago: “The successful commissioning of new capacity is now being achieved, but is always a risk.”
- Investment case: One, profitable, competitor supplies over 90% of the market, with SCE taking share. Single supply was a most anomalous auto OEM position; now SCE also supplies. The combined OEM 8 then OEM 10 orders, while true “game changers”, simply fitted into the broader SCE place in the market expansion. In-house skills were honed by the scale-up disruptions.