Pre-close trading, AGM and prospects

SCE is delivering its £390m order book but still faces headwinds. It is knocking down the obstacles, giving detailed explanation of progress, and, indeed, output has been consistently good since late June. Clearly, this is not as early as hoped. We maintain our 2024E sales, but we have reduced several forward profit estimates. This means that we now estimate a £2m gross cash outflow for 2H24, with a stable 2025, and rising 2H25 and thereafter. Significantly, from here, there are now duplicated pieces of kit at each point. Disappointments, to date, have been about rates of delivery acceleration, which, nonetheless, are almost doubling each year.

• Results summary: 2023 revenue rose 81%. Many months ago, we had to cut expectations sharply of £23m sales and maiden profits. A major extra contract from existing customer OEM 10 was won. SCE is delivering on five multi-year contracts. End-2023 gross cash was £6.1m, £5.0m by end-June 2024.
• Operations: Importantly, since mid-June, production on a consistent daily basis has been twice the rate of the prior five months. COO, Stephen Easton, in post since September 2023, has overseen a £9.1m capital spend and a wide series of enhancements, including significant rises in manufacturing yield.
• Cash and profits: Our “takeaways” are for cash to reduce by ca.£2m in 2H24, with EBITDA breakeven in 4Q24, 2025 EBITDA cash generation and thereafter, pre the funded capital expenditure. We maintain 2025 and downgrade 2024 due to lower margins and 1H24 production-led slippages.
• Risks: The reduction of scrappage is expected to continue to improve to below 14% by the end of this year. This supports a first EBITDA profit in 2025E but only modest; cash generation is pushed back to late 2025. We understand clients are “onboard” with the more modest delivery rises.
• Investment case: The market opportunity and competitive moat are exciting. as is the order book. Frustration at the slower-than-expected production ramp-up, and the cash impact, is material, but rates are broadly doubling annually. For the ongoing capital expenditure programme, we estimate EBIT returns on capital equipment at 20%-30% p.a.