Surface Transforms: Further new order, upgrades, production ramp-up

We are very encouraged by the further significant upgrades following Surface Transforms plc (LON:SCE) interim results announcement. This is over and above the upgrades from August’s new OEM 9 order. The order book is now £190m (£50m end-2020), with more rises promised before end-2022. The results, announced 5 September, cover a period where production ramp-up was impressive and the resilience of gross margins proven. The major milestone of profitability is achieved this half year. We raise 2024E EPS by 39%, on a 12% sales upgrade. Operational gearing is at play but also the confirmed continuing robustness of gross margins.

  • Order book quadruples in under two years: The most recent win is a new customer, OEM 9. SCE is winning more than its fair share in this rapid-growth market. Three OEMs generate 2023E revenue, five in 2024E. End-sales of these car models have waiting lists themselves, which adds visibility too.
  • Growth ramp-up: 2H22E revenue, remarkably, is over eight times 2H21. When many businesses are seeing gross margins fall, Surface Transforms has not; indeed, we upgrade 2022. Year-in/year-out cost efficiencies – shared with customers to grow the market – are a given. Importantly, they are ahead of expectations.
  • Direction of travel: Globally, there is only one – larger – competitor, and SCE is taking share. It is clear and detailed about its extra contract pipeline of new models for existing customers and also of new OEMs. This is because of lengthy interaction with OEMs pre-order. Rapid capacity growth matches this.
  • Risks: Sales increases lead to a definable rise in working capital needs. New capacity has now been successfully commissioned but is always a risk. Much capex is in $, which is all hedged. Gas is a noticeable input and our numbers assume high prices, which SCE is countering through major efficiency gains.
  • Investment case: Surface Transforms is rapidly growing its 10% market share in this fast-growth market. Single supply was a most anomalous position for an auto OEM market; now SCE is one of only two suppliers. Thus, the OEM 8 orders, while true “game changers”, simply fitted into the broader SCE place in the market expansion. Now OEM 9 has arrived too. SCE delivers on a global OEM base.

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