here is the tip :
Greetings CityVoice listener
its been a while since we sent out our newsletter. Our writers have been busy with other projects and contributing their skills in launching a new magazine very soon.
We have rushed this newsletter to bring to your attention one very underlooked stock. Surface Technology Sytems (STS) is an AIM company that is in semi conductor equipment sector. What does STS do ?
STS designs and manufactures a range of highly specialised machines incorporating innovative technology used in the production of semiconductors and semiconductor related devices. Semiconductors, which are miniature electronic circuits, are usually associated with memory chips in computers. However, STS serves a range of applications outside this 'mainstream' memory chip market in several emerging sectors within the telecommunications, information technology and new micro electromechanical systems industries.
These emerging semiconductor markets have experienced rapid growth in recent years and have the potential for further growth as demand continues to increase for high technology products such as fibre optic telecommunications networks for Internet infrastructure, high speed wireless communication devices for mobile telephony and a new generation of sensor devices used in the automotive and aerospace industries and other mass markets.
STS is a market leader in silicon etching within the growing MEMS market with patent protected technology. In addition, STS has strong presence in each of its other served markets and distributes its machines world-wide through an experienced sales and service operation consisting of direct sales, distributors and agents.
The business was originally established in 1984 as Special Research Systems Limited ("SRS"), a division of Electrotech Equipment Limited ("Electrotech"), to develop and manufacture plasma processing machines. In 1989, SRS was merged with two other Electrotech subsidiary companies to create a new company of 65 employees which was renamed at Surface Technology Systems Limited ("STS") in 1990. STS maintained close technical links with Electrotech, but operated with increasing autonomy and established its own dedicated international sales and service network. As part of this network, Sumitomo Precision Products Co., Limited ("SPP") was appointed in 1993 as the Company's distributor in Japan.
In March 1995, STS was acquired by SPP. Shortly after the acquisition, the board of directors took the strategic decision to focus resources into two key market segments, being MEMS and Data Storage, which led to strong growth being achieved by the business. Since then the Group has extended its activities to provide machines for the manufacture of optoelectronic and wireless communication devices, and advanced Advanced Packaging solutions.
In May 1997, STS relocated to a new purpose built factory at Imperial Park, Newport and received the Queen's Award for Export Achievement. In the following year, STS also received the Queen's Award for Technological Achievement for its Advanced Silicon Etch (ASE) Process.
At the end of 2000, STS was floated on the London Stock Exchange. The capital raised enabled STS to further invest in technology and product-related research and development, as well as expanding the after-sales service structure. Following the Placing, the SPP shareholding was diluted to 66.7% of the issued share capital on Admission.
The Latest :
In July's trading statement, this was announced :
"Multiple orders continue to be won and recently the launch of the new Pegasus System has also contributed to the improving level of order intake. As a result, the order backlog has increased substantially since the end of last year. Providing the new opportunities translate into orders that can be delivered this year, it remains entirely possible that STS will exceed the current market expectations for the second half of 2005. " and
In the interim results (Sept) apart from the expected loss they had this to say :
"For 2006, the probability is that STS will enter the New Year with a much higher level of order book, compared to the start of 2005. If order intake remains at the levels achieved during the last two quarters it is entirely possible that STS will also exceed market expectations for 2006. "
The reality is they have had a very busy year end and are still receiving good orders for 2006 so we expect them to be profitable for 2006 with 2005 second half showing slight loss to break even. Together with the 3m they raised from the parent company, Sumitomo (SPP) in mid year, they received a 3m (50% of its market cap) technology order in late December for which the market overlooked - we suspect due to the announcement being made during the holiday period. 2.7m of this cash will treated as profit for the financial year 2005. So in effect they have around 5m to 6m cash balance which roughly equates to the market cap of the company.
Looking at sector as a whole, 2006 is going to be a very strong one indeed. STS is in a unique position to benefit greatly from this boom. Its in area of the equipment sector that surpasses the competition without doubt. We believe they have already signed a very lucrative contract with a well known Japanese conglomorate and is in talks for orders with a US giant. These could well be announced next week when they issue a trading update which we believe will finally kick start the shares re-rating. Back to the sector, a well known research firm on 10/01/06 issued this :
We are incrementally more positive on semiconductor equipment stocks," Piper analyst C. William Lu wrote in a recent note.
"We see sustainable bookings growth over the next three quarters [and] positive surprises for capital spending guidance by large chip makers."
The research firm said it foresees higher spending from Intel (nasdaq: INTC - news - people ) and Taiwan Semiconductor Manufacturing (nyse: TSM - news - people ).
"We see upward revisions and positive announcements by the chipmakers driving another 20% upside for the large cap names and more for the small cap companies,"
STS shares are very thinly traded so that little trade will move the stock. With 32m shares in issue, 63% is owned by the parent company Sumitomo and 23% is owned by institutional holders. So 14% is available as free float. With 1,000 shares as the normal market size we suggest readers not to chase the share price too much if because of this newsletter the price is marked up. We strongly believe the shares at current prices are an anomoly when looking at the prospect of significant order announcements, strong trading for 2006 and the strong possibility of profitability for financial year 2006.
Simple facts : Name : Surface Technology Systems PLC EPIC : SRTS NMS : 1,000 Market Makers : 3 (Wins, Scap, Hood) Current price : 18.5p (mid) Spread : 17p - 20p
We suggest readers to get on board as we feel the price will be nearer to 50p once the market wakes up to the potential of this overlooked company. However we have set a year target of 100p considering boom year semi equipment sector will have in 2006.
IMPORTANT NOTE :
1. You should always do your own research before considering purchasing shares. 2. Share prices go down as well as up. 3. Only invest what you can afford to lose. 4. All content is intended as information only and does not constitute a recommendation to buy, sell or hold any share or stock. 5. All data contained within should be treated as estimated, and should be verified for accuracy by you. 6. If you are unsure of any investment decision you should consult an Independent Financial Advisor.
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