Surface Transforms Analyst Q&A: Very strong steps with more to come (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: Surface Transforms have announced a major contract win with a manufacturer of EV’s, Robin what can you tell us about this news?

A1: We initiated research coverage in mid-August on the company and we said at the time that we thought that they now had the products, the capacity, quality, and the pricing to win new bigger clients and they’ve now started to do this .

As you say, they’ve won a £27.5 million contract with a manufacturer of EV’s, for reasons of commercial confidentiality they don’t disclose the name of the customer but we view this now as their leading customer in terms of reputation and global presence in the EV market. So, as we’ve said, the contract’s worth £27.5 million over 3.5 years, there is potential for an extension for a further 2 years.

I think partly what this does is it demonstrates the particular benefits of carbon ceramic disk brakes for EV’s in terms of lower weight and braking performance for ultra-quick acceleration.

There are some particularly pleasing aspects to this contract, they are the sole supplier so they’re not in competition with any other supplier, the price has been agreed and also, these discs will be the standard fit rather than optional which I think helps revenues stability and visibility.

In terms of our numbers, the revenues really start to kick in from the  second half of 2021 so we’re lifting our 2021 revenue forecast by 80% today and 2022 by 120%. Now, there are some costs associated with the start up of this contract so we’re assuming around £3.8 million of additional employee insurance and other costs so profitability doesn’t really start to ramp up until 2022 and beyond. That reflects the high operational gearing in this business.

Overall, in our forecasting period, which is 2020 until 2022, we’re adding £10 million of additional sales and £2.6 million of net profit for this contract so that’s a margin of 25% on this additional activity which, as you can see, is quite a healthy margin.

Cash will also start to improve significantly in later years, there will be some more capex to service this contract but the cash position of the business should now improve dramatically as we go through the next couple of years.

So, I think, overall, we’re very pleased with this contract win, it’s one of a series of recent contract wins, it demonstrates that they have a high quality product and they’re getting their pricing right. We think the company is on its way to becoming a major volume supplier to the automotive industry.

Q2: I presuming these changes will affect your view on the company in terms of fair value?

A2: Obviously, the share price has reacted very well to this news today, what I would point to is some of the fundamentals we discussed in our initiation note.

It is potentially a very large market, the company has talked about a potential market of 2 billion, perhaps rising to 4 billion if you can provide ceramic disc brakes to the lower end of the performance car scale so the £50,000 – £75,000 list price vehicle. If you can supply discs to that market, the potential is still very large from here and as the company say, they hope to make more announcements in the coming months.

Q3: Looking forward, what do you hope to see from Surface Transforms in terms of news flow?

A3: Well, they’ve now secured two larger customers and there is a third one they’re targeting and hopefully they will be able to announce something on that customer in the coming months.

So, I think they’ve made some very strong steps in the last few months and hopefully with more to come.

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