Surface Transforms Analyst Q&A: Good momentum with compelling potential upside to earnings & valuation (LON:SCE)

Surface Transforms plc (LON:SCE) is the topic of conversation when Zeus Capital’s Research Director Robin Byde caught up with DirectorsTalk for an exclusive interview.

Q1: We see that you’ve just initiated on Surface Transforms, what were the key features you highlighted in the initiation note?

A1: We think the company is at a very interesting stage in its development. They design and make advanced carbon ceramic discs for braking systems and these discs are mainly fitted to higher priced cars.

In this note published today, we take a deep dive into the investment case, we look at the product itself, how do braking systems work, the characteristics and the superior characteristics of carbon ceramic discs. We consider the group’s customers and recent developments with production and the supply chain, we also look at the markets and competition and, as you’d expect, there is detailed financial analysis, particular analysis of the potential upside to our forecasts.

Now, I would say that this is highly disruptive technology, carbon ceramic discs versus traditional iron discs, they have a lower weight, they have a better durability and a longer life than those traditional discs.

Lower weight and better durability are better for the environment, it’s good for fuel consumption, good for CO2 emissions and also good for brake pad dust which is an emerging environmental pollution issue. I’d also say that the lower weight of these discs is particularly good for us with EV’s, offsetting higher battery weights. The negative is that these discs are still more expensive to buy so they can be up to ten times more expensive than conventional disc brakes but when you take into account the total lifetime costs, they are much more competitive.

Turning to SCE, the company is moving from a long R&D phase to volume production, they’re now winning new OEM customers with hopefully more to come, it’s a well invested production and manufacturing platform. Now, the market is currently quite small, valued at, we think, around £250 million each year but the potential is in the billions if the price of these carbon ceramic discs start to come down.

The company is helping to open up the market, they’re providing much more capacity for their high quality product, higher volumes and this is bringing down the price of discs. I think it’s also important to say that in the context of weak automotive markets, their contracts are multi-year, their revenues are generally contract-backed so there’s a degree of visibility and stability in their numbers that you might not see in other automotive suppliers.

Looking to trading, the outlook and the balance sheet. I think the balance sheet is in reasonably good shape, the company raised fresh equity in May to support their finances. Subsequent to that, the company issued a trading update saying that markets are tough, I think we all know that, but they are weathering the COVID-19 storm and they have taken significant actions to their production and their costs to mitigate those risks. Also, I would say that sales are ahead of our expectations.

Looking to the next reporting event and catalysts, we have an interim statement coming up at the end of September and hopefully we will get more positive news on contracts and progress with investments in their operations.

So, I think in conclusion, the company has good momentum, I think there is compelling potential upside to our earnings and valuation.

Q2: How do you view the outlook for the company?

A2: I think, over the medium term, the outlook should be very positive. The market they’re addressing is potentially very large, they have a competitive product both in terms of the technology and pricing and the real prize here is to see much more adoption of carbon ceramic discs on higher priced cars. This is superior technology, as I’ve said, both in terms of weight and durability and in terms of total lifetime costs.

Q3: Just in terms of competitors, are there many?

A3: There’s one main competitor in the market, a company called Brembo SGL, actually they dominate the market and that’s a very unusual situation in the automotive supply chain, it’s very unusual for there just to be effectively a single source supplier. Part of the story is also offering dual sourcing to OEM’s and that is gathering momentum in itself.

Q4: In terms of an investment case, how do you actually view Surface Transforms?

A4: I think there are a number of aspects to this:

  • The company has a high performing, high quality product, therefore it’s competitive with its main rival
  • The technology is well suited to EV’s, particularly in terms of weight savings
  • It’s a well invested platform with plenty of factory space for expansion
  • They have started to secure medium-term contracts and we hope that there will be more to come.

I think the market opportunity is very significant, as I’ve mentioned, currently valued at about £250 million each year but potentially it’s a multi-billion pound contract. Dual sourcing is gaining traction, I think OEM’s require dual sourcing for pretty much every component they buy and that currently doesn’t really exist in this industry, in this vertical, and this is now changing. Barriers to entry are high so they have one dominant supplier and you have SCE which is an emerging competitor but barriers to entry to further new entries to the market are high.

I think the recent fundraising has built resilience and they appear to be weathering the COVID storm well having introduced various cost savings and efficiency measures. I think, also, our forecasts we hope are conservatively framed so there should be good potential upside if they can win new contracts.

Click to view all articles for the EPIC: ,
Or click to view the full company profile:
Share on facebook
Facebook
Share on twitter
Twitter
Share on linkedin
LinkedIn
Surface Transforms Plc

More articles like this

Surface Transforms Plc

Gateley advised on Surface Transforms’ AIM fundraising

Gateley have advised specialist manufacturer, Surface Transforms Plc, on a £20m AIM fundraising. Liverpool-based Surface Transforms, which manufactures brake discs for the automotive and aircraft industries, raised £20m by way of a placing and open offer of shares

Lookers Plc

Lookers Q1 trading performance better than expected

Lookers plc (LON:LOOK), one of the leading UK motor retail and aftersales service groups, has provided the following trading update for the three-month period ended 31 March 2021. Summary In line with Covid-19 restrictions, the Group’s dealerships remained

JTC Plc

JTC completes acquisition of RBC cees Limited

JTC plc (LON:JTC), the global provider of fund, corporate and private client services, has confirmed the completion of its acquisition of RBC cees Limited from RBC Holdings (Channel Islands) Limited, part of RBC Wealth Management. The acquisition was

Surface Transforms Plc

Loan from Liverpool increases Surface Transforms funding

Surface Transforms, which manufactures next-generation carbon ceramic brake discs for the automotive and aircraft industries, will receive a £1 million pound loan from the Liverpool City Region Combined Authority, according to a recent report posted on BusinessLive.com. The company,

Sumo Group Plc

Sumo Group achieve revenue growth of over 40%

Sumo Group plc (LON:SUMO), the award-winning provider of creative and development services to the video games and entertainment industries, has announced its final results for the year ended 31 December 2020, which show substantial growth in revenue and Adjusted