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Surface Transforms – despite delays, argues “continue to look forward with confidence”. Hmmm - cash crunch ahoy?

By Steve Moore | Wednesday 21 June 2017

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

Surface Transforms (SCE) has made an “Operations, Customer and Pre Close Trading Update”, including that a German OEM is “now expected to introduce the company's products earlier than expected - on racetrack cars - in 2018” and “the company is now in full production, on all processes, at Knowsley”. However, other news is far from positive…

For a start, with the same German OEM, “extended testing of road cars means volume sales delayed by one year” and with a British OEM (‘OEM 1’) “delayed first models understood to be due to challenges they are having with brake system integration - unrelated to the discs”. It is added “the customer's solution appears to have been to ask the company's competitor for a holistic caliper and disc system offering… The company continues to include the second model for OEM 1 in its planning as it will be offering a joint caliper, disc and pad solution to the OEM”. Hmmm.

Then, further, there are “continuing delays on commencement of aerospace revenues originating from the airframe manufacturer” and “sales for the year at £702k, were lower than expected, as during the period of limited capacity, management took the decision to switch saleable parts into test parts for the extended OEM 3 test programme”.

The company seeks to emphasise a year-end “£889k total pipeline is the highest visibility of next year sales the company has ever had (31 May 2016: £427k)”, also noting cash of £1.53 million, with also an expected more than £0.45 million R&D tax credit receivable in December and claimed, but not yet received, grants of £0.118 million. However, this compares to £2.70 million of cash at the 30th November half-year stage.

My previously stated cash concerns are also highlighted in it stated that “financing options available” are being considered for a potential £0.75 million for changes to the production process from meeting further product requirements.

CEO Kevin Johnson though reckons “we continue to look forward with confidence” as the noted frustrations “do not change the end game… serving a potential £2bn market where a monopoly competitor has current sales of over £100m. Our customers want us to succeed in providing a second source supply”.

Johnson’s spin has though not really worked – the shares 17% lower, below 16p. With the statement also not really doing anything to assuage previously stated concerns, I continue to avoid.

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