A New Chapter for SDI - 31/05/24

Regular visitors to the blog will no doubt be aware that Cambridge based SDI Group has featured heavily here, not least, as I have been invested in and covering the company for some ten years now.

Whilst no share that I am aware of has ever moved northwards without some retrace, SDI had, until more recently enjoyed significant ongoing share price traction since those early days. Indeed, the journey was one of from just 11p in early 2014 to over £2.00 in 2021, providing for excellent gains.  

However, given the various economic headwinds and following on from a strong performance driven by Covid related business, SDI’s shares fell significantly from previous levels, culminating in a 51p low point earlier this month.

The departure of long-standing CEO Mike Creedon arguably compounded the unease (albeit, largely amongst retail investors), so it was good to see the company releasing a positive and reassuring year end trading update last week.

This was clearly welcomed by the market and initiated a sharp recovery in the share price from the low point, the price now standing at 71.5p

The statement that was released, saw the full year 2024 numbers cited as coming out in-line with expectations, which in turn will see revenues of £65.9m giving adjusted pre-tax profits of circa £9.6m.

Pleasingly, there was a strong H2 performance, which following the previous headwinds and some apparent sluggishness across certain aspects of the business perhaps bodes well for the year now in play.

In order to hear more on how the financial year concluded and the prospects ahead, I caught up with management once again, this time with CEO Stephen Brown and CFO Ami Sharma.  

Having noted a specific reference on positive performances from a number of portfolio businesses across the group, including Chell and Monmouth Scientific, I thought that this was a good point to start, particularly as Monmouth had previously endured some apparent difficulties.

CEO Brown, said that following the previous downgrade on numbers and the carrying out of various roadshows, the intention was to really focus on specific aspects across the business and that had included Monmouth.

He added that the performance there clearly wasn’t going in the right direction and various things needed addressing quickly.

“They had a strong order book” he explained, “but there were lots of operational challenges within it, although there were also opportunities, so we wanted to really turn that around and put it in a much stronger position going forward.”

Brown went on to say that there was a lot of low hanging fruit on which to concentrate and in conjunction with looking at the leadership, processes, culture and motivations of the business, they now have improvement plans in place and the business has been hard driven.

That has resulted in what the CEO describes as something of a turnaround taking place, where he points to a huge market potential for that business. Frustratingly, part of the problem was not necessarily down to the lack of orders, but more an inability to actually get them out of the door.

Brown has extensive operational experience and is clearly keen to drive the business forwards in order to accelerate growth to acceptable levels and the result thus far appears to be one of delivery, as all of Monmouth’s profit for the full year came in the second half.  

Chell has also been a positive story, after going through something of a lull following undergoing the process of recalibrating their product strategy.

“One of Chell’s strengths and where I feel it is one of the strongest of the groups businesses” commented Brown, “is they really understand the markets in which they operate and in great detail too.

They can really hit the market where it hurts in terms of getting their product to fit and they are very much reaping the benefits of doing that.”

Expanding on this, CFO Sharma said that Chell sold a mixture of larger systems as well as smaller products, where with the latter, they invested over time to address an identified market demand.

As a result, there has been a marked and significant upturn on this front in the second half of the year and that trend is expected to continue.

Although Chell has done ok over the last three of four years, Sharma says that it is only now that it is beginning to really take off, which is both boosted and underpinned by some solid market diversification.

Aside from both Chell and Monmouth, I also wanted to touch on ATIK, which had been the key driver of the previously record numbers for SDI.

Commenting on this aspect within the group, Brown said, “ATIK is a strong business, but the vision of it has been distorted due to the significant single COVID driven order, so it went from a circa four  million business, up to one of twelve million.

So, what we’re doing now is really finding a new norm for that, which doesn’t mean it is a bad business, far from it.”

Elaborating, the CEO added that it is still highly profitable, the gross margins are really high and it has differing offerings including the astronomy market which has been tracking up and securing some sizeable orders.

That said, Brown pointed out that with two sites, those being Norwich and Lisbon, it is the case as with other aspects across the group that there was scope for some cost management.

Again, in keeping with Chell and Monmouth, ATIK also enjoyed a strong close to the year which was aided by its largest customer in the US coming through after a period of destocking.

The beauty with ATIK, Brown added, is that it doesn’t take a lot of growth to drop through to the bottom line, which is why it remains one of the stronger components within SDI.

Regarding other arms within the group, whilst there clearly wasn’t the time to touch on everything, I thought it worthwhile just homing in on Synoptics.

This is the original part of the business and at one time the generator of circa 80% of the revenues and where being based in Cambridge I have visited a few times.

Having for years flatlined on revenue, in more recent times it has been somewhat turned around, where it boasts some decent technology products, although notable growth appears to have eluded it.  

Brown, was happy to comment and said it is another on their focus list to look at, acknowledging that there had been a lot of new investment into products. “Historically, it didn’t necessarily move with the times” he said, “where they just tended to sell the same products into the same market.

There has been a very recent mindset shift in that business though, where they are looking at what’s next in the industry”.

This has seen a lot of time and investment applied to the Autocol line of products which Brown says is currently in trials with some really large industry players.

The CEO sees Synoptics at a tipping and transition point, particularly on the Autocol front.

All of the development costs there have been committed last year, so now, Brown added, it is all about returns this year and building sales on what is some smart tech that is ahead of the game in its field.

Looking ahead to the year now in play, broker Cavendish currently has revenue of £70m pencilled in with an adjusted pre-tax profit of £10.3m giving EPS of 7.4p which implies a PER of under 10, which looks very good value if delivered.

CFO Sharma, said that when they announce the full year 2024 results in July, they will also provide an update on the guidance for 2025.

Brown added that activity on acquisitions remains a firm focus for them, where there is a strong deal flow, which having suffered a bit more recently, is now incredibly strong.

Any further bolt-on-buys are not however factored into existing forecasts, where there is an internal focus on organic growth.

On this aspect, Brown refers to Monmouth, commenting, “we have already seen the benefits of what we have done at Monmouth, but we haven’t stopped there by any stretch. It is just the start of it, so we are really trying to settle that business and move into new markets, so we are going to see nice steady growth there.

Fraser Anti-Static Techniques is pretty much the same, and we are really pushing them into US markets and also others such as Japan and S. Korea, coupled with a drive into further OEM traction in Europe, so we are going to continue to focus on the businesses with potential for growth.”

The overall strategy is one of delivering on the growth and profit and whilst the CEO stresses that they aren’t going to see the likes of 20% growth across the group, he expects it to come through at the higher end of a forecast 5%-8% range.

“What we now have is a stabilised growth, we know where it is coming from and we have got the confidence that it is there and we can deliver, along with continuing with acquisitions.”

Having taken up the mantle, Brown has run a very close eye over the businesses and the operation of those, which has resulted in Uniform being offloaded as he concluded that it was just diluting good margins and that it had to go.

There are, he added, one or two others that need attention, but that they can, with the right work, deliver on their potential going forward.

Overall, he says that they know key aspects of the group where there is strong growth that is well above the quoted target figure, so the plans are very much in place to drive those others at the lower end of performance to optimise the potential and deliver on profit.

Concluding, Brown said that synergies that hadn’t previously been delivered on, were also a key driver now and that he feels a lot more confident on the major aspects of the business than when he first arrived at the company.  

Management across the various arms is also paramount going forward where he stresses that this is another aspect that is being actively monitored and changes implemented with talent being a key for ongoing growth and continued success.

With an active pipeline of further acquisitions Brown says there are opportunities at the right price, but the company is obviously limited in terms of spend.

Priority from an extensive list at the right price is a major feature and Brown said that they are in a sweet spot with the opportunities that exist right now, describing it as a strong situation to be in.

He added that there is an active short list, so it may be a case of watching this space as we progress through the year.

Sharma added that they are healthy within their debt range and are cash generative and they can currently fund further bolt-on-buys through the debt facility.

Free cash flow per year is currently circa £6m-£7m which provides scope to control the debt which will rise and fall, but as further bolt-on-buys come through, cash will accelerate.

From a personal perspective, SDI has been a great story, given I came on board below ten pence per share over ten years back.

Of course, it has been less enjoyable for those that bought at or near the highs who are no doubt under water at present.

But, Stephen Brown appears to be making the right decisions and is clearly keen to take the company forward through the next chapter of its journey.

If he and the team here can demonstrate on the delivery front in the coming months and beyond, the shares should once again perform and for me, remain very good value at the current levels.