Solid State share price slump 'absurd'

When Solid State won a three-year government electronic tagging contract worth £34 million, its share price rocketed over 60% inside a month. Sixteen months later, the shares were back where they started at around 400p.

However, this is likely just a temporary setback; this maker of hardwearing computers and electronic kit should benefit from increased spending on the army's special forces following terrorist attacks in Paris, and business is ticking along elsewhere.

We were told back in October, post year-end, that Solid had made a "satisfactory" start to the year, but that the Ministry of Justice (MoJ) contract would be delayed - one of the other three companies in the consortium is to blame, not Solid.

There'd also been a hold-up at the Q-Par business, which supplies expensive antennae for the Airbus A400m military transporter. In all, second-half profit would be "significantly lower than expected" and the full-year figures would be "below market expectations".

Now, we know that profit before tax actually fell 4% in the six months ended 30 September to £1.49 million on revenue up 29% to £22 million. Management also took the decision not to increase the well-covered dividend.

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Importantly, the MoJ contract is not lost - and is unlikely to be, given its high-profile nature and the fact this is the second time ministers have tried to make offender tagging work.

Remember, G4S and Serco lost the contract after billing government for offenders who were either back in prison or even dead. Government departments are also being told to slash budgets, and electronic tagging does that.

Solid has already received £3.5 million from the contract, but chief executive Gary Marsh expects only £5 million for the full-year. Michael Gove, appointed Secretary of State for Justice in May, has already appointed a high-profile trouble-shooter to get things moving again. He's due to report back to Gove in the New Year.

'Scope for material upgrades'

Analyst Eric Burns at WH Ireland has stripped out all but £1 million of MoJ business from his estimates for the year ending March 2017. He pencils in revenue of £41.5 million, pre-tax profit of £3.3 million and earnings per share (EPS) of 36.5p.

Admittedly, profits in 2017 will be only marginally better than they were in 2015, but Burns reckons the share price fall has been overdone - Solid shares have plunged as much as 59% since July to a low of 379p. They're up at 459p now, putting the shares on a forward price/earnings (PE) ratio of 12.6 times. But add back MoJ money and it's more like 7.6 times.

"There is clearly scope for material upgrades once the contract gets back on track, yet the shares trade around their 2014 level prior to both the contract announcement and the acquisition of Ginsbury - this seems slightly absurd," says Burns. "The shares are oversold and we move to a 'buy' recommendation." Fair value is put at 577p per share.

Remember, too, that Solid makes about 30% of turnover from defence contracts, mainly secure communications equipment. And in the aftermath of the Paris attacks, spending on special forces and high-level communications equipment will inevitably increase. As well as rising demand here, Solid supplies kit to the big US and UK "primes", or their contractors, as well as governments in Asia Pacific.

Elsewhere, Solid is in the running to replace 5,000 ticketing machines used by the 13 UK rail operators. They sell for about £1,000 each and come with bluetooth and mobile phone chargers. Although Solid may not get every contract, its product is said to be better, and the first order is already in the bag.

Distributing LED lighting on behalf of Luminus Devices Inc and low energy microprocessors for Silicon Labs should be lucrative, too.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.