Surface Transforms

November 2019 Investor Forum

20 Nov 2019 / Corporate research

The year when it all came together:

ST is a specialist designer and manufacturer of carbon ceramic brake discs. This is a highly innovative component for the auto OEMs (original equipment manufacturers). Globally, there are two suppliers to this market. ST’s product is proven, having sold to the retrofit market for some years. 2019 has seen the first multi-year orders placed with ST. Potential clients’ tests take years. In 2019, ST secured its first three global OEM orders. Our estimates reflect these orders alone. With them, ST is cashflow positive for 2021. It thus has an assured seat, with long and extensive barriers to new competitors, in a market that should evolve to £2bn annual sales or more.

  • Strategy: ST has executed on its strategy to supply carbon ceramic brake discs to global OEMs. High technical barriers exist to new competition. As of 2019, OEMs – with ST’s new contracts – have the dual sourcing that is always required for a market to properly take off. 2019 itself thus opens the door to ST’s acceleration.
  • Visibility: ST has been years in testing and proving both the product and the manufacturing process. The time spent, in itself, creates a significant economic moat. It also underpins appropriate gross margins. The initial market gravitates towards luxury models with a waiting list, and hence visible off-take profiles.
  • Sustainability of growth potential: Initial contracts are multi-year. We expect significant additional contracts, not reflected in our numbers. ST’s three existing major OEM clients will have further models coming. Other OEMs have ongoing ST testing. Furthermore, manufacturing capacity is in place for £17m sales.
  • Evolution of risks: ST is set to be cashflow positive by 2021. It is the right side of high barriers to new competition in a high growth market with only one competitor. The product requires a delicate marriage of manufacturing and chemical engineering skills. ST’s high R&D spend has secured this.
  • Investment summary: ST’s technical competence is demonstrated by years of modest retrofit sales, but the 2019 orders open the door to a market, which we firmly expect will grow to £2bn p.a. ST’s 2019 contracts have been a ‘game changer’ both in the early evolution of this component market and also for ST itself. There are a variety of environmental benefits to this product.
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