Surface Transforms

High visibility for 2021 onwards; equity raise

17 Apr 2020 / Corporate research

ST’s position as one of only two global manufacturers of a new automotive component – carbon ceramic brake discs – brings major opportunities for investors and the automotive industry. The OEM (original equipment manufacturer) order book is ca.£28m, generating gross profits equal to the market capitalisation. Timing here is set firm: 2021 will bring material revenues from the OEMs. This only scratches the surface of the market opportunity. COVID-19 has affected 2020 and – with an increase in equity limited to 10% – investors have put their shoulder to the wheel, so that ST has successfully countered the cashflow impact.

  • ST’s potential is clear: With a superior product and with OEMs keen to promote dual-sourcing from a credible new supplier, it is set to win a large share in the £150m, fast-growing carbon ceramic brake disc market. Sales to smaller customers are longstanding; ST has now expanded to a new league.
  • Our forward estimates only reflect existing contracts: Pre-tests for additional prospective clients are progressing well. Start of production dates for OEMS are contractual and the models benefit from long forward pre-sales. COVID-19 hits 2020 sales, but there is no reason to change estimates for 2021 and beyond.
  • ST has arrived: 2019’s success in winning its first OEM orders transformed ST’s industry-wide visibility. The lead times are over a year on the tests the OEMs undertake, giving good indications of pipeline opportunities. Only one competitor exists, and no others are envisaged for many years.
  • Risks: COVID-19 has affected 2020 revenues, as this year is dependent on the shorter-order book of retrofit and race-track cars. The risks of longer-term sales shortfalls to existing OEM contracts are minimal. Even if the 2021 racing season were to be half that of 2019, which we do not expect, cashflow would be neutral.
  • Investment case: This is a large, growing market, 99%-supplied by one, highly profitable player. A single supply is a most anomalous position, so now that ST also supplies, its opportunity is wide. Since the 2019 OEM contracts, the path is clear to ST discs being designed-in for many more models. Existing contracts make ST cashflow-positive from 2021.


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