The latest Investing Matters Podcast episode featuring financial educator and author Jared Dillian has been released. Listen here.
They were producing small quantities of discs for many years without issues, in scaling up they used larger more energy efficient furnaces, a problem was found with the linings of a furnace as far back as 2022 which was later reported as resolved but there are three different types of furnace for different processes so this could be a new problem. ST say it is a case of perfecting manufacturing with new equipment which they state they are getting on top of with production in March double that of Jan and Feb but they don't claim to of resolved the issues as yet.
Poole, the furnaces as far as I know have performed well since Q2 2023. The issue started in late 2022, these were new larger energy efficient furnaces, the linings failed within weeks when they should last at least 6 months. New linings were developed and fitted this took about 4 months to achieve with a slow ramp up over the next 2 months . The last news we had is the new linings were exceeding expectations.
There is also the prospective pipeline of £300m, this refers to future planned models that both the OEM and ST have done engineering work on. So far the prospective pipeline has ended up as part of the order book and the only reasons it wouldn't is if the model was cancelled or the OEM decides to change supplier.
Due to a disastrous 2023, a recent share placing and a very negative AIM market we are where we are. I can see a massive potential future valuation for this company but there are risks. The April update needs to show progress with production, lessons should of been learned from previous breakdowns that stopped production but until the £50m capacity expansion is completed there will be parts of the production line that still only have one machine in place. The possible single points of failure will reduce as capacity is installed but not sure how much will be operational in Q1. I feel reasonably confident but Q1 performance will be mostly about what the engineers have learned.
I wasn't expecting a fundraising, the 50k and 100k sells recently were a clue I suppose although I stupidly ignored them and bought a few this week .
SCE is another company I hold that has striking similarities to HDD in that they are a British engineering company entering a safety critical market with a superior product, a recent surge in demand saw the SP at 70p+ but scale up has been problematical with them requiring additional fundraising on top of money already raised that was supposed to see them through to self funding, this has resulted in the SP falling to a 5 year low of 9.5p. If Hardide were to see a dramatic increase in demand then I would tend to agree with Dibs that a buyout may be the best option. In this situation the barriers to entry would be very relevant.
I'm hoping for more positive progress in the aerospace sector, the adoption process has taken many years but we are now a proven product in a safety critical market. I wouldn't expect the value of this to be reflected in the market cap with the current situation but the more successful Hardide are in this sector the move valuable the barriers to entry become.
I remember previous Polarean presentations saying how using their technology could reduce the research costs for drug companies, I can't remember the figures but it was a fraction of the cost of MRI. I'm only guessing but the drug companies should be able move quicker than Hospitals especially if the cost savings are as good as Polarean claim.
Would an OEM really lend? .......... I think OEM10 is a possibility as they seem closer to the company than most standard business relationships. They were involved in solving the furnace issues and wanted ST to build their second production facility close to them in the USA. They now have £200 M in contracted orders with ST so the sooner the company is financially stable and able to focus on capacity expansion the better for everyone.
The thing is James a contracted and prospective order book totalling £710 million with a 60% gross margin points to a company that will be multiples of its current valuation in the near future. A takeover now would be like selling fifty pound notes for a fiver.
The company have said there are always production problems but they are normally resolved quickly, the reason it has been such an issue is the new energy efficient furnaces fitted to bring capacity up to £20M were breaking down due to the linings failing after a couple of weeks when they were designed to last at least six months. This problem came to light at the end of last year when supply chain issues were much more prevalent so finding a solution and companies to provide the materials was problematical. This was solved in house with help from the OEMs who were informed of the production problems when they occurred.
It took about 4 months to find a solution but the linings at the time of the AGM were still functioning and may well outlast the expectations of the originals. The furnace problems happened at a time when ST had no spare capacity so with new equipment bringing capacity up to £50M progressively this year i'm hopeful and reasonably confident of things going well at the moment.
Many of the buys have been going through below mid price but there are some obvious sells at or fractionally above bid price. The unusual thing is since Tuesday there has only been one market maker on the bid (ZEUZ). They went on the bid at 30p when there had only been one trade of 10,000 share above 30p all day. Since then they have taken on a lot of stock without moving to the offer in fact they moved their price up to 31p about an hour before the close so they still have the best bid price after (SING) moved their bid price to 30p this afternoon.
SCE have 8 market makers and you would normal see them changing from one side of the order book to the other on relatively small volume, it looks likely that (ZEUZ) are taking on stock for someone
I don't think your missing anything ironknut there has been about a 50% rise in the SP from recent lows so your always going to get a bit of selling along the way. I read the results again last night and it makes interesting reading with the hindsight of the Philips collaboration news, this is what they said about corporate partnering in the results.....
"We continue to believe that corporate partnering could be an important part of the Company's business plan. We see the opportunity to help the pharmaceutical industry reduce by significant amounts the size, time required to conduct and costs of their pulmonary drug clinical trials by providing quantitative, reproducible image-based data. We also see the opportunity to partner with MRI manufacturers to open up the MRI applications space to include pulmonary diagnostics, driving the demand for more MRI systems. In addition, we will explore the opportunity to partner with pulmonary disease organizations and foundations to incorporate the use of Xenoview in the diagnosis and treatment of disease."
They have said that several weeks of uninterrupted production was needed to confirm the furnaces problems have been resolved so I think they would be reluctant to say anything before April. I have been invested in SCE for a long time, I've never found them to be a leaky company, the news flow previously was all about progress with OEMs, recently as shown by the £100m OEM 10 contact announcement with all the potential future carry over models the SP took a two week break then continued to slide due to production issues. In this transitional phase progress in the expansion program has become the main consideration.
Has the SP performance been due to leaks of a continued breakdown?, This is obviously possible as the entire workforce, the furnace manufactures, and various suppliers would be aware of this.
Is it because AIM growth stocks have become increasingly out of favour especially if the news flow has not been totally positive?
Is it because any downward SP movement is seen as proof that there must be a problem causing more selling ?
My gut feeling is the April update will not be everything we could hope for but good enough to change the SP direction.