Surface Transforms

Funding for growth: Open Offer

22 Nov 2023 / Corporate research

In the past two years, Surface Transforms (SCE) has quadrupled its order book, raised monthly sales run rates from £0.2m to £1.0m and expanded its capacity four-fold to a £20m pa sales rate. A 3 November update pointed to production teething troubles. October sales of £1.0m were below prior estimates, so we significantly reduced our 2023 and 2024 estimates. We estimate PAT breakeven for 2H24. Initially from debt, SCE has the resources to finance capital expenditure from internal cash flow to raise its capacity to £150m by 2027 and to grow beyond that as one of only two global suppliers to this large and growing OEM (original equipment manufacture) market.

  • Environmentally driven: The order book has reached £390m. The product’s lower weight, hence fuel efficiency, is one of several environmental legislative-driven benefits to OEMs. Recently the LSE awarded SCE its Green Economy Mark.
  • High barriers to entry: OEMs demand excellence and SCE has been solidly R&D-led. There are years of testing required; SCE is one of only two ever to have tried and achieved this challenge. As to the production challenge, SCE’s new production line as it is being completed is smoothing out bottlenecks.
  • Growth: The order book alone equates to ca. £80m pa sales average. There have been minor but cumulatively meaningful teething troubles upgrading the production line. October volumes were over double the 2022 rate, which itself was over double 2021. Our reduced estimates reflect the 3 November update.
  • Risks: The commissioning of new capacity is now being achieved, but there have been frustrations, delaying SCE achieving break-even to 2H24E. SCE and its clients work as partners in the sales evolution. A major sales increase leads to a (definable) increase in working capital needs.
  • Investment case: The SCE order book has grown dramatically. The market opportunity and competitive moat are exciting. We now see a clear path to order book delivery, while recognising frustration at the slower-than-expected production ramp up, and the cash impact. Turning to ROCE, excluding work in progress needed, we estimate EBIT returns on capital equipment at ca. 40% pa.
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