Surface Transforms Mar 07

SURFACE TRANSFORMS ********EPIC: SCE*****PRICE: 20p*****SECTOR: AIM*****MARKET CAPITALISATION: £2.81m******** **PROSPECTIVE P/E: N/A**PROSPECTIVE NET YIELD: -**NET CASH: £1.47m**NEXT RESULTS: AUGUST** Surface Transforms is aiming to organically build a niche business in the licensing of proprietary carbon ceramic composite technology. The initial focus has been on automotive and aircraft brake applications and rocket motors are also seen as a primary market. Key secondary markets, where development is undertaken, include clutches and brakes for motor sport and light armour in the ballistics market. Having previously been listed on OFEX, which has since become PLUS Markets, the company joined AIM in 2002. Although the business has remained loss-making since then, overheads have been kept under tight control and future profitability is now achievable on relatively modest sales. With net cash at the end of February representing 9p per share, the current market price places little value on what has been achieved to date. Although losses are being forecast in the immediate future, the management team has a keen eye on the bottom line and is aware of the need to demonstrate profitability.

***INTERIM RESULTS***INTERIM RESULTS***INTERIM RESULTS***INTERIM RESULTS** Results for the six months ended 30 November 2006 were released in February and these showed turnover of £116,439, up strongly from £68,302 the previous year. The reported loss after tax was £292,098, which was also an improvement on the same period in 2005 when a restated loss after tax of £384,511 was posted. The net cash outflow from operating activities was narrowed from £681,688 to £431,100. The company is keeping control of cash well and factors such as interest and tax repayments resulted in net cash of £1.47m being held at the period end. The management team was strengthened during the period with Ken Baker joining as a non-executive director.

KEY POINTS: Operates in an innovative, niche market Collaborative R&D project will boost financial performance and cash flow  Costs under control  Strong net cash position, which equated to 9p per share as at 28/2/07  Experienced Board of Directors  

12 Month High/Low: 28.5p/11.5p

*****FOUR YEAR RESULTS AND FORECASTS******FOUR YEAR RESULTS AND FORECASTS******FOUR YE Year to 31 May

Turnover (£m)

Pre-tax Profit (£m)

Earnings per share (p)

P/E Ratio

Net Dividend (p)

Net Yield (%)

2004A 2005A

0.43 0.26

-0.25 -0.68

-1.36 -4.47

N/A N/A

-

-

2006A

0.16

-0.92

-5.79

N/A

-

-

2007E

0.30

-0.70

-5.10

N/A

-

-

******ACTIVITIES******ACTIVITIES******ACTIVITIES******ACTIVITIES******ACTIVITIES****** Tracing its roots to a business founded in 1992 to exploit new composite manufacturing material patents obtained from ICI, Surface Transforms was incorporated in 1999. The following year the company was introduced to OFEX and by September 2002 had moved to AIM. More recently, the business operations have physically moved to Olympic Park in Ellesmere Port, where all activities are now under one roof. The core activity is exploiting proprietary technologies to create innovative, lightweight, high energy dissipating braking system materials which can be commercialised for high-performance applications. Automotive brakes and clutches are an area of particular focus and SystemST, a braking system for the prestige and performance car market, provides weight savings of up to 70% alongside other favourable characteristics such as an improved friction coefficient. The Koenigsegg CCGT racing car, shown at the Geneva Motor Show 2007, is fitted with SystemST brakes and this could help in winning motor sport contracts. Innovative materials have also been provided for rail brakes for high-speed trains and CFRCs (carbon fibre reinforced ceramics) developed by Surface Transforms offer a number of properties which set them aside from carbon-carbon aircraft brakes. Aerospace components, rocket motor systems and ballistics are other areas where applications can be used. For instance, the company has worked alongside the UK Ministry of Defence to develop CFRC materials to replace more traditional ceramics in body and vehicle armour.

***PROSPECTS***PROSPECTS***PROSPECTS***PROSPECTS***PROSPECTS***PROSPECTS*** Although to date the company has reported very little by way of turnover, there is now a clear strategy in place to move towards profitability. Whilst it could be easy to allow costs to run away with themselves in some of the exciting markets in which Surface Transforms operates, the experienced management team have kept a tight rein on costs. This means that profitability can be achieved through a very sensible level of sales, particularly in the automotive market. Having moved to the new site at Ellesmere Port, there have been significant cost savings and increased productivity. All manufacturing and development are carried out at this location. Testing is also managed from the site and the company has a full-scale brake testing dynamometer which is particularly useful in motor sport markets. Surface Transforms works alongside some very interesting partners and operates in a dynamic marketplace. The company has a healthy cash balance which means that it is able to move forward without wasting management time on raising new capital. In March it was announced that the DTI led Technology Programme has funded a grant of £600,000 to a consortium of companies spearheaded by Surface Transforms. This is part of a three year, £1.34 million collaborative research and development programme covering the innovative use of recycled carbon waste material for use in brake systems for cars and brake friction products on aircraft. This will provide a contribution to overheads and also see cashflow improve by around £140,000 for each year that the project runs.

***CONTACT DETAILS***CONTACT DETAILS***CONTACT DETAILS***CONTACT DETAILS***CONTAC Analysts: Simon Flather Lucy Clapham Chris Bragg

Contact Name: Kevin D’Silva - Chairman Kevin Johnson - Managing Director Tel: 0151 3562141

Date of Report: 11 May 2007

Contact Address: Unit 4, Olympic Park, Poole Hall Road, Ellesmere Port, Cheshire CH66 1ST

DISCLAIMER

Significant Shareholdings: J Faria: 13.2% J M Finn Nominees: 11.4% Gartmore Investment Mgt: 7.7% Prof D T Clark: 7.1% Artemis Investment Mgt: 5.8% Bank of New York (Nominees): 5.1% Barclayshare Nominees: 4.6% Advance AIM Val Real Co Ltd: 4.2% Securities Services Noms: 3.3% Giltspur Nominees Ltd: 3.2%

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