Open Offer

Surface Transforms (SCE) has announced the raising of £6.5m new equity and is launching an Open Offer to shareholders. It is raising capacity and quarterly revenue but has needed to address the two sets of production constraints it faced: scrappage and process-line pinch points. Pinch points have been much reduced through capital expenditure and expert maintenance teams. Major capital expenditure is ongoing and unaffected by the fund raise. The scrappage from the fast ramping up of volumes is reducing but still a problem. This, and volumes being below expectations, lead to the need for extra working capital. SCE is delivering product to a range of OEMs.

• Chief Operating Officer: COO, Stephen Easton, in post since September, has overseen doubled monthly sales revenue. Our figures assume a 90% increase from the 1Q24 achieved to the 4Q24 estimate. Scrappage was 25% in 1Q24, well down from 2023, and SCE states the current quarter’s 17% expectation.
• Operationally driven: The £390m order book and the environmental benefits are robust. The furnace maintenance issue reported last year, at the heart of the process, has been addressed. The cash-damaging scrappage problems have been reduced, as methodology has matured from a development-style process.
• Growth: The current order book equates to £80m p.a. sales average amid troubles upgrading the production line. 4Q23 volumes were over double the 2022 rate, which itself was over double 2021. Current revenue is over twice the 2Q23 level, but we lower our 2024E revenue from £23m to £17.5m.
• Risks: The reduction of scrappage is expected to continue to improve to below 14% by the end of this year, supporting a first EBITDA profit in 2025E. We understand clients are “onboard” with the more modest delivery rises. A major sales increase leads to a (definable) increase in working capital needs.
• Investment case: The market opportunity and competitive moat are exciting. as is the order book. We have frustration at the slower-than-expected production ramp-up, and the cash impact, but rates are broadly doubling annually. For the ongoing capital expenditure programme, we estimate EBIT returns on capital equipment at 20%-30% p.a., excluding work in progress cash.