Keep an eye on Solid State

Making ruggedised computer products for the military, emergency services and the aerospace industry is proving lucrative for AIM-listed Solid State. It grew underlying pre-tax profit by 16% in the year to March, and chief executive Gary Marsh tells us new government initiatives are "potentially transformational."

Mr Marsh is referring to Whitehall's commitment to put 25% of its spending through small-to-medium- sized enterprises (SMEs). The money could potentially arrive from a number of different agencies, he says, not just the military.

And that is Solid's strength. It doesn't rely on any one sector to drive profits. The company supplies the machines used by ticket inspectors on the railways, by police for number plate recognition, and for use in dust carts. It sells bespoke lithium battery packs, too, and the expensive antenna fitted to the Airbus A400m military transporter.

Last year, Solid made £2.15 million, giving adjusted earnings per share (EPS) of 25.3p, helped by a few acquisitions. And the order book is up 42% to £14.7 million, with the backlog spread across a range of businesses, including secure communications and LED lighting.

Top line growth is certainly expected to accelerate. A £3.5 million export deal at lower margins flattered the 2013 numbers, capping this year's increase in revenue at 2%. Mr Marsh says secure communications is growing well, driven by demand for systems on warships, hand-held devices and antennas.

And organic growth is supplemented by sensible, earnings-enhancing acquisitions. Solid State has become quite adept at it, and Q-Par, the high-tech antennae business it bought last year, has beaten expectations. More acquisitions are likely, admits Mr Marsh.

House broker WH Ireland has upgraded forecasts for 2015 by 18% and now expects adjusted EPS of 28.6p, rising to 30.4p for the year after. That puts Solid State shares - currently trading at 400p - on a forward price/earnings (P/E) ratio of 14. WH Ireland reckons a multiple of 15 is more appropriate, implying a target price of 429p and limited upside from current levels. While that looks fair, the shares are certainly worth a look on any weakness.

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