SOLID STATE: SMALL CAP BIG POTENTIAL - 21/09/26

Every now and again a company comes along where, having done the initial research, I find myself wanting to really get under the bonnet, rather than simply rely on the numbers and the usual RNS commentary.

Solid State (SOLI) is one such company.

I recently took a position in the shares attracted by a combination of specialist technology, exposure to some interesting growth markets and, importantly, what I believe could be considerable operational leverage as the business grows.

The defence and aerospace opportunity is clearly a major part of the attraction here, but it is the potential within some of the less obvious areas of the business that also caught my attention.

Having bought the shares, I wanted to do what I always think is worthwhile with such a smaller company, that is speak to the people actually running it.

As a result, I recently caught up with both the CEO and CFO in order to hear more and garner a greater feel for the business and the opportunities ahead.

Those conversations gave me considerably more to think about, particularly around Project Cain where a $10.8m initial contract to supply MPU5 and Wave Relay radio technology to the MoD was previously announced with potential for follow-on orders.

Additionally, the company’s increasing exposure to drones and the longer-term earnings opportunity provides for further upside potential.

For those that are unfamiliar with the business though, SOLI is probably best described as a UK-based, AIM quoted value-added electronics manufacturer and specialist design-in component distributor.

In that context, the company designs and supplies ruggedised computing, custom battery power systems, antennas, and secure communications hardware, each of which sit in growing and continually evolving markets.

And what SOLI provides, are typically optimised for critical and harsh environments across the defence, aerospace, medical and energy sectors where there is also a high barrier to entry.

CEO John Macmichael was quick to brief me further on the structure of the group.

“At the start of the year, we reconfigured into three divisions as opposed to the two that we had,” he said.

This now translates into Systems, Power and Components, with John explaining that the move was designed to increase focus and transparency and provide shareholders with a much clearer understanding of the individual businesses.

The current split in terms of revenue distribution is 40% in both systems and components, with power accounting for 20%.

Power, currently the smaller aspect of the company is now represented by Custom Power, a combined UK and US operation.

That business specialises in the design and manufacture of bespoke battery packs, battery management systems and highly engineered power solutions for demanding applications across defence, aerospace, medical and industrial markets.

This arm was expanded by the acquisition of a US acquired operation, which was bought some four years ago and has clearly boosted the offering and opportunities.

John said the two operations are now working much more collaboratively.

Although initially, following Covid, demand softened, significant work has subsequently gone into strengthening the operation, including changes to the leadership team, and John stressed that it is now doing exceptionally well this year.

He also highlighted the strength and performance of the US operation, particularly across the drone market where it has been very successful.

Speaking specifically on the latter, John said, “Once a drone gets beyond the line of sight, you can’t afford for that to drop out of the air, so it really requires a very high level of reliability.”

And that requirement for reliability is central to what Custom Power provides.

Importantly, what is delivered extends beyond the obvious, into cameras and sensors, key aspects of ensuring overall drone functionality and the end application.

The Systems division represents SOLI’s long-established systems capability and operates principally through Steatite.

It designs and manufactures ruggedised computing, communications and other specialist electronic systems for applications where reliability is critical.

The business also has expertise in antennas, secure communications and increasingly complex integrated systems, with both defence and security representing important end markets.

The third division is Components, operating under the Solsta brand.

While this is principally a technical component distribution business, I think describing it simply as a distributor rather undersells what it actually does.

Solsta supplies semiconductors, embedded processing, sensing, switching, power management, optoelectronics, displays and other specialist components.

Crucially, however, it also works with customers at the design stage, providing engineering support and value-added services as products move from development into production.

John highlighted this as an area where he believes the investment case has not always been fully understood.

“One, it is an engineering business that designs products in, which then secondly sees the recurring business from the design wins.

“We are often criticised for the lack of order visibility here and the Solsta order book is never more than twelve months from any one customer.

But, what I think we have failed to get across, is that it can get repeat orders on the same programme for ten years.”

That distinction between order visibility and programme longevity struck me as particularly important and highly relevant.

A component may only appear in the formal order book for the coming year, but once it has been designed into a customer’s product and that programme enters production, the resulting revenue can potentially continue for many years.

This is particularly relevant to the defence and aerospace markets, where qualification requirements, reliability and long product life cycles can create significant barriers to replacing an incumbent component supplier.

Having been derailed across the business a couple of years back due to the delay of a significant order that was subsequently delivered, SOLI now looks to be in a position of improving structural growth and operational strength.

That progress doesn’t appear to be reflected in the current valuation though, where the market cap of £97m and a share price of £1.71 is well below the high of £3.08 achieved two years ago.

The reorganisation into three distinct divisions now provides for a more focused and clearer view of the individual businesses, which comes at a time when expectations have been raised and the outlook remains positive.

Indeed, the full year 2026 numbers bear testament to the progress achieved, where revenue increased markedly on the prior year, moving from £125m to £154m.

This in turn delivered an adjusted EBITDA figure of £13.9m, up around 48% on 2025, where adjusted PBT came in at £8.6m, giving EPS of 11p.

Clearly, the end markets appear to remain supportive and SOLI looks well placed to make further progress, with broker Cavendish currently forecasting revenue of £159m for this year, alongside adjusted EBITDA of £14.9m and adjusted PBT of £9.7m.

As with any business, margins are a key and integral ingredient of what’s on offer and to this end CFO Peter James was happy to expand on specifics.

In particular, he spoke of the Systems Steatite business, where he pointed to the smaller antenna aspect of its business as particularly enjoying high margins.

Despite the sales here being at the smaller end, typically in the mid-single digit millions, 60% plus gross margins are achieved.

The end markets are typically very sophisticated areas of the military, but it also embraces other industries including adoption by the met office.

Peter added that whilst there was huge demand, the issue with scaling up was often the difficulty in finding the right people to really fully embrace the opportunity.

In navigating that path, ongoing investment is being made with what he described as real attention being applied.

Other areas of Steatite see gross margins of 30% to the low 40% range, where markets are defence, security and medical and this part of the group currently enjoys the strongest margin return.

That said, power isn’t far behind now, with an overall figure of 35.8% and has what Peter described as real scope for scale.

“The power division has the scale for growth and there is an exciting opportunity in the US, with Autonomy being a big driver of that, although not to the detriment of other areas”, he said.

The third part of the group, components, is currently achieving gross margins of 26.8% which represents an improved performance driven by organic growth for US AI data centre's and IoT markets.

Importantly, this is ideally placed to benefit from operational gearing and management is keen to drive that.

As with any business aligned to defence markets, there is an element of lumpiness that can prove difficult to manage in terms of visibility.

Peter acknowledged the issue and accepted that SOLI has come in for criticism in the past for the lack of long-term visibility.

Steps have been taken and are ongoing to mitigate this though and he said this included a much greater emphasis on designing new products and getting them into the field.

That should aid to build the order book and whilst internal funding is being made, some development is being undertaken through customer funded non-recurring engineering charges.

There are also other initiatives in place to assist, such as partnering with bigger primes and drilling down on internal cross group synergies.

Peter accepts that the lumpiness will never be completely eradicated, but that tangible progress should be made.

The penetration into larger accounts and inking bigger contracts is the aim with a goal of increasing the three-five-year order book.

Looking ahead, he added that they currently have good confidence in delivering on the current consensus numbers for this year and longer term the preferred measure in terms of delivery is very much the earnings per share number which resonates with investors, where the goal is to hit 20p EPS by 2030.

And with the emphasis on growth, John also added that drones will continue to provide the fastest commercial traction over the next few years.

As previously mentioned, orders related to Project Cain represented a significant win and Peter explained that the $10.8m had been delivered in the first half of this year.

Perhaps more interestingly, the $10.8m initial CAIN order may prove rather more significant than the headline figure suggests.

Although the entire order has been delivered, John was clear that the customer is committed to the programme and that the current order does not equip them with everything they require.

The obvious caveat is that management cannot say when further orders will materialise, but this is therefore not simply a case of winning a $10.8m contract and moving on to the next one.

There is potentially a much longer relationship here that encompasses additional equipment, further users, training and through-life support, all potentially valuable aspects of the food chain.

Although much of my focus here has been in and around defence and security, healthcare is also another interesting end market with strong growth credentials and John gave me a flavour of what is on offer.

Here, specific products are supplied to Siemens for sensing applications within IV infusion systems, where they play a role in monitoring for air in the system.

Additionally, in the US, SOLI also has an active role supplying technology into incubator applications for children, including systems associated with oxygen support in what is clearly a potentially critical setting.

Although there are clearly a number of growth levers supporting the organic pathway, acquisitions still feature as providing for additional support.

To this end John said that further buys remain on the agenda and anything would likely come in the form of a complete business with a strategic emphasis.

This could come in the form of a small bolt-on-purchase or something more significant, where John pointed out, they remain opportunistically aware.

Either way, any purchase John explained would have to align to their core markets and complementary.

Although recent months have been quiet on the news front, the nature of the business could see something land at any time, whilst the confidence emphasised in hitting the full year numbers is reassuring.

And as for the balance sheet, I am also comfortable, with £6.6m of cash and manageable net debt of £4.2m.

The £13.5m of cash generated from operations is another positive, while the substantial order book provides a useful degree of visibility.

Taken together, I think SOLI now offers an interesting combination of specialist technology, exposure to attractive end markets, improving margins and potentially meaningful operational leverage as the business scales.