Small-cap winners and losers: Solid State and Flybe

It's been a day of mixed fortunes for the UK's smaller companies. Investors will be cheering this technology play, but hating Flybe, writes Graeme Evans.

Small-cap investors with a focus on potential recovery stories needed to look no further than the contrasting fortunes reported by Solid State and Flybe today.

Shares in AIM-listed Solid State, which manufactures value-added technology for use in harsh environments, put on as much as 16% today after its first-half trading update highlighted an improving and better-than-expected outlook.

This bucked the recent downward trend for shares, although at today's level of 320p there's still some upside to broker Finncap's 400p target price.

In contrast, the headwinds facing regional airline Flybe continue to stiffen after a fresh profit warning was blamed on softer demand as well as fuel and FX pressures, leading to expectations of a £22 million full-year loss.

Shares dived 37% to a record low of 20p, with house brokers Liberum and Numis Securities cutting their price targets to 33p and 30p respectively.

Source: TradingView (*)      Past performance is not a guide to future performance

The situation at Flybe is particularly frustrating for investors as its strategy to reduce capacity and focus on its most popular routes delivered both higher load factors and revenue per seat in the first half of the year.

This has been undone by the weakening of consumer demand in both domestic and near-continent markets in recent weeks. Across the year, Flybe is facing an estimated £29 million hit from weaker sterling, fuel and carbon prices.

Chief executive Christine Ourmières-Widener, who was appointed in January 2017, said: "We continue to strengthen the underlying business and remain confident that our strategy will improve performance."

• Share Sleuth doubles stake in this AIM tech stock
• Why Solid State has recovery potential
• 13 shares for the future

Flybe is not alone in facing these challenges, with Liberum having recently cut its forecasts for easyJet and Ryanair due to fuel cost headwinds. Ryanair shares are down 12.5% in the past month, with easyJet off 15% and Wizz Air 16% cheaper.

Cutting its target price on Flybe by 10p, Liberum said: "Given the airline’s limited forward visibility on bookings we see the balance of risks to our new estimates as remaining on the downside."

Recent FX movements have been much more favourable for Solid State, whose recovery potential has been highlighted in recent months by our companies analyst Richard Beddard.

Shares peaked at over 900p in 2015, but problems with a Ministry of Justice contract and, more recently, a slowdown at the communications unit, have relegated the stock to more modest valuation multiples. 

Source: TradingView (*)      Past performance is not a guide to future performance

A reorganisation of the business and greater focus on higher margin products in areas such as robotics, artificial intelligence and fanless PCs have since made Solid State an interesting stock to watch again.

With the help of FX tailwinds and good trading in both its value added distribution and manufacturing divisions, the group said it is on track to exceed market expectations for the financial year. The order book stood at £29.6 million, which is a new record and an increase of 64% on a year earlier.

As a result, Finncap is upgraded its earnings per share forecast by 7.8% to 27.3p for the current year, and by 6.7% in 2020. The 400p price target is based on a price earnings multiple of 14.6x.

Director of research David Buxton said: "The shares have been poor performers and this encouraging update should provide investors with some increased confidence."

Solid State, which serves niche markets in oil and gas production, medical, construction and security, has been listed on AIM since June 1996.

*Horizontal lines on charts represent previous technical support and resistance.  The red line on the Flybe chart represents the downtrend since 2014.