CASH IN THE ATIK - 07/05/23

Out of the small cap market gloom came a burst of sunshine yesterday with a truly excellent pre-close update from SDI Group.

Perhaps the most covered company on this blog and without doubt my personal favourite stock, SDI has once more delivered and in superb style.

The Cambridge based company announced that revenues and adjusted pre-tax profit for the year ended April 2022 will now be 6% and 10% above previous guidance, whilst organic growth of in excess of 20% has been achieved.

Additionally, very strong operational cash flows have been demonstrated, which in turn have come in significantly ahead of market expectations, completing a raft of positives.

Having what has now become something of a customary catch up at such times with both Chairman Ken Ford and CEO Mike Creedon, we spoke again yesterday morning and where not surprisingly there was no evidence of complacency or self- congratulation, as both remain focused on driving the business further forwards.

Whilst acknowledging that the year just ended had been a good performance, Creedon is more than happy to speak of the year now commenced where he says that the company is well on track for what will be a record performance.

Such confidence given the current economic climate shouldn’t be dismissed, particularly given that both Directors are historically cautious regarding prospects and performance.

Whilst the standout player in the group has been Norwich based Atik which has perhaps overshadowed other businesses, the performance certainly hasn’t all been down its contribution.

That said, Atik has clearly performed exceptionally well on the back of its relationship with a Chinese OEM relating to PCR systems.

Although Creedon cautiously and wisely doesn’t expect further orders of the magnitude from this end, he nevertheless does expect to see recurring revenue ahead.

Additionally, given the ongoing lockdowns across China and that nations nervousness regarding Covid and further variants emerging it could be conceivable that the nature of the PCR related business does have some way to run yet.

Creedon tells me that Atik is in a good spot, with the Lisbon arm supporting the UK base and where the management structure has been strengthened.

The long standing Steve Chambers has stepped down, but does remain in a consultative role and he has been succeeded by the former development director as the CEO.

Additionally, a new technical sales director has been a positive appointment, where as a result of that, Atik has what Creedon describes as a foot in the door with new potential OEM’s regarding Atik's cameras.

Whilst nothing can be confirmed on this front as yet, it nevertheless sounds promising and would be a further endorsement for this star performer and create additional revenue streams.

Moving onto other aspects of the group, Creedon says things are going well where he says that Synoptics in Cambridge has enjoyed another good year, where the software license aside, saw the business trading better than the previous year.

This sees a welcome continuation of the transformation of this business that has been driven by Kate George and Claire Hough.

The most pleasing performances for Creedon though came from Graticules and ATC which he describes as going extremely well with ATC having just resided over its best year ever.

Graticules he says has also performed strongly and there has been a refurbishment programme which also sees a plan to expand the building.

At the Monmouth arm the CEO points out that there has been a change of mix within its business following Covid which although this sees it having a really strong order book, it is nevertheless experiencing issues regarding a shortage of service engineers at present.

Creedon says that they haven’t lost any business on this front, but it remains a challenge at present recruiting engineers, although he is confident they will overcome the issue.

He is also extremely pleased with the acquisition of SVS which was made in January of this year which he says could prove to be a really cracking business that despite only consisting of seven people is on track to make close to £1m this year.

In terms of the SDI board level, CFO Jon Abell who has been an integral part of the success of the business in recent years is set to retire in a few months time, but will be on hand to ensure a smooth handover.

A search has been underway for a replacement since Abell announced his intention to retire and Chairman Ford says that they are at an advanced stage of this process and will announce the successor in due course.

Looking ahead to further acquisitions Creedon and Ford are continuing to work closely in sizing up further opportunities and the CEO says that they have a number of potential buys in the frame.

These, Creedon adds, will be paid out of its own cash resources as opposed to going back to the market for a raise which he is happy to rule out.

In terms of cash, Progressive expects a total position of £7.4m for the end of the financial year now commenced with a net cash position of £3.5m, although that will certainly change should a further buy be undertaken this year.

The cushion provides SDI with ammunition to execute, but arguably, implies that further bolt-on buys will be at the lower range in monetary terms.

That isn’t a bad thing at all though as It is a strategy that has paid off so well for the company’s growth and allays any fears of it embarking on a much bigger play that could prove risky.

It is something both Ford and Creedon have repeatedly stressed they are wary of, so it looks like a continuation of the proven and successful path ahead.

Looking at Broker FinnCap’s note from yesterday, the expectations for full year 2023 are for revenues to hit £53.1m with EBITDA at £13.1m giving adjusted pre-tax profit of £11.2m and adjusted EPS of 7.7p.

SDI has been a truly outstanding performer for me and others over the last eight years which has seen the shares increase from circa 8.5p to a current £1.69p.