ANOTHER BUY FOR SDI - 25/10/22

Whilst there hasn’t been much in the way of consistency or positivity across the markets of late, in particular the small cap space, it is refreshing to see SDI Group continuing to perform.

My last comments here on the company came back in July of this year, following the release of its preliminary results, so having now announced another highly significant acquisition, the time is perhaps ripe for some further comment.

Having also attended the AGM in September, it is perhaps worthwhile my now tying in the two events for some further insight, following my speaking with both CEO Mike Creedon and Chairman Ken Ford once again on Monday afternoon.

Firstly though, I’ll refer back to the AGM held in Cambridge, where there were just three of us private investors present, but which nevertheless provided for ample opportunity to quiz management after the various points on the agenda had been dealt with.

Aside the familiar board faces and a farewell to Jon Abell,  a new non exec Andrew Hosty was introduced along with the incoming CFO Ami Sharma, both of whom already appeared very well versed in the SDI model and come with strong credentials.

Questions asked from the three of us investors,  included the big ATIK contract with the Chinese OEM where it was confirmed that this would end in October/November 2022.

This had however, been well flagged and although it was stated that a repetition of this kind of order particularly in terms of scale was not expected, it was not completely ruled out.

Indeed, it was said that it seems likely of some repeat business coming through, but which would be of a significantly smaller sum of money.  

As regular followers will know, the SDI board is consistent and cautious, so it is certainly correct to take the view that this business may well not be repeated.

Sticking with ATIK, there was no further news or elaboration on additional OEM’s that appear to be in the background and again, they will not say anything on this front until something is firm and in play. 

That seems wise and consistent as Messrs Ford and Creedon prefer to deliver as opposed to over promise.

On energy costs within the group, there were no worries expressed with renewals not due until next year, which provides for a level of comfort and it was added that businesses within the group were going well.

The old issue of increasing Brexit red tape and export problems was mentioned too, which has been a bane for many smaller companies.

For SDI’s operations though it appears all is well, as they took various steps to mitigate any potential problems such as further utilising the Lisbon arm for ATIK along with other measures.

On the subject of further acquisitions, it was said that they certainly wouldn’t overreach, which can prove the undoing of many buy-build operations, so it would be more of the same.

Equally, it was also stated that looking beyond the UK would be considered, but they remain focused on the right addition and the price which meets their criteria.

They also added that during Covid a couple of things had been looked at, but they had terminated any discussions and walked away.  

And that, brings us up to speed with the latest announcement which sees the company buying Devon based Fraser Anti-Static Techiques Ltd.  This is a UK based, but global player in the manufacture of anti-static equipment, where it is focused across a broad range of industries.

To give a flavour, Fraser’s extensive product range serves the likes of cleanrooms where static electricity is one of the largest contributors for attracting airbourne contaminants.

Packaging production is another area specifically affected by static causing materials to behave in an unpredictable or negative way. These are however just a couple of examples of end markets where, although something of a niche business has growth opportunities ahead.

The estimated total cost here is £13m, net of approximately £3.9m excess cash acquired and is the largest to date for SDI, which has previously acquired in the range of under £10m.

Speaking with both Creedon and Ford, they are delighted with the addition, particularly given the global revenue stream and see it as an excellent fit.

Creedon tells me that Fraser’s largest market is Germany where it has a subsidiary which ensures there are no post Brexit issue as touched upon earlier.

He also informs me that they actually discovered the business through the accountants and advisors of Safelab, which itself had been acquired by SDI earlier this year.

The acquisition will be funded from SDI’s existing cash resources and revolving credit facility, where, as at 30th September the group had circa .£3.3m of cash, £7.0m bank debt and a £13.0m undrawn bank facility.

Given the size of this deal, I enquire as to funding of further deals and in what bracket these could fall.

Both CEO and Chairman adhere to their established mantra in maintaining their own strict rules where there is no wish to become heavily geared or indebted, particularly in a changing era for interest rates.

Expanding, they said that they currently have their eyes on a couple of other attractive possibilities, but these are much smaller propositions which they could fund adequately.

Further along, they acknowledge that something in the same range as that of Fraser would require a potential raise, but both were at pains to point out that this isn’t on the agenda in the near term and reiterated that they have the smaller options, that are attractive in their own right to be going on with.

In general, business appears to be going well across the group and cash generation remains positive, as the board was quick to identify inflationary headwinds and reacted accordingly.

The Fraser acquisition also brings with it a freehold property and Progressive in its latest note forecasts that Fraser will add around £3.5m to revenue and £0.7m to adjusted EBIT for SDI Group for six months in FY23E, with a full-year contribution for FY24E of around £7.0m and £1.5m.

This sees a full year 2023 group revenue of £66.1m and adjusted pre-tax profit of £12.4m with EPS at 9.9p.

For the following year 2024, Progressive factors in the unpredictable nature of the ATIK (Covid related) orders and rightly assumes a substantial drop off in comparison to the last couple of years.

This sees a Progressive expectation for 2024 revenue at £68.8m with pre-tax profit of £12.6m and EPS flat at 9.9p.

At this juncture, it is worth remembering that there could be a surprise to the upside here, as ATIK is increasingly active across further fields and in any case, it could well win some additional business from the Chinese OEM.

Additionally, there are other businesses within the group that continue to have growth opportunities both close to home and further afield.

SDI has an established track record for consistency and caution, so one should assume that they are factoring in the current uncertain macro headwinds along with issues closer to home, so that should provide for confidence in at least meeting the numbers out in the market.

Looking further ahead in terms of the runway for the group and the men at the helm which is a question often asked,  neither Ford or Creedon are looking to step down in the foreseeable future and remain firmly focused on driving and building the business to new heights.