Good morning!
Solid State (LON:SSP)
Share price: 590p
No. shares: 8.23m
Market Cap: £48.6m
The same contract win as was announced on 15 Jul 2014 has been re-announced today with financial details added now they have been finalised. I don't normally comment on contract wins, unless they are financially material, which this one is. It's certainly large relative to the size of the company - a £34m contract to supply the Ministry of Justice with electronic tags for monitoring hooligans. This should produce an operationally geared benefit to profits;
It is expected that the gross margins on the contract will be in line with the gross margins normally achieved by Steatite on its larger contracts.
This has resulted in the house broker upgrading their profit forecast for next year by an enormous 80%! It's not often you see that scale of upgrade, although the excitement should be restrained by the fact that this is a one-off contract win, so at some point the market will start getting nervous about the contract ending.
The broker (WH Ireland) suggests that 12 times next year's 54.5p EPS forecast is a suitable price target, which equates to a price target of 654p. That looks sensible to me, so most of the upside has already been baked into the share price, with about another 10% upside possible now. That's not enough to tempt me in. Pity, as I like this company, and did hold some stock a few months ago, but cannot remember why I sold them - probably because funds were needed for something more exciting that had come along. Annoying when that happens - when you sell something good prematurely. Oh well.
Usually a parabolic share price rise like the one below is a disaster waiting to happen, but in this case it's been driven by newsflow, and the price is supported by reasonable assumptions and sensible forecasts. So I reckon this price rise will probably mainly stick.
Which got me on to thinking, how does one predict this type of thing? That's tricky, as if you had advance knowledge of a material contract win, then you would be an insider, so buying the shares in advance of the news would have been illegal. I'll have to go back through the previous outlook statements from the company, and see if management gave any clues in advance in…
