CATCHING UP WITH SDI - 13/05/23

SDI Group is without doubt the one company that I have been covering for the longest period of time on this blog and indeed, is very much a long-term holding for me, going back to 2013/14 when I made my first purchase.

During that period, the progress, results and shareholder returns have been nothing short of spectacular where on a personal level the shares have, until recently registered a 20x multiple increase from my starter point.

On Thursday of last week though, the shares embarked on a rare retreat as the company delivered a Pre-Close Trading Update that resulted in a considerable reigning back on the 2024 numbers forecast by both broker FinnCap and Progressive Research.

Quite understandably, long-term investors were somewhat mystified, caught in a scratch of the head moment, whilst more recent holders arguably took fright, heading for the exit door as the shares dropped circa 16% on the day.  

As I have spoken on numerous occasions with the management team here, I again caught up in order to gain some clarity on the picture and importantly the prospects going forward.

Firstly though, it is worth just briefly recapping on the numbers highlighted in that pre-close update relating to the year ended 2023, which came in-line as expected.

This has seen revenues actually performing ahead of the earlier stated expectations at circa £69m representing a 39% increase on the prior period, with adjusted pre-tax profits at £11.8m and adjusted EPS of 9.2p.  

As holders of SDI shares or those watching closely will know, the last couple of years has seen profit and cash swell significantly, largely on the back of significant business for the ATIK arm via its contract with a specific OEM partner in China.

However, SDI had on more than one occasion clearly stated that this business was effectively a one-off and was coming to an end, where it was highly unlikely to be repeated.

Indeed, at the AGM last year, CEO Mike Creedon in answer to my own question on this aspect of the business stated that there would be no repeat and that the contract was very much coming to an end.

CFO Jon Abell did however leave the door slightly ajar, saying at the time that he believed that there could still be an element of some recurring revenue related to that OEM, although this has clearly not played out.  

Looking ahead to the year now in play, it would appear somewhat surprising that the previous 2024 broker forecast numbers had actually included a sizable element of both revenue and profit relating to the Chinese OEM business, which seems somewhat bizarre.

Particularly given that SDI had been extremely open in already drawing attention to the contract coming to an end, with Creedon clearly stating as much on more than one occasion.  

The new FinnCap numbers now see revenue for the full year 2024 pencilled in at £71m with EBITDA of £13m and £9.8m in adjusted pre-tax profits as adjusted EPS drops to 7.3p.

This is clearly quite a pull back on the previous guidance and given that the ATIK related business was high on the margin front its absence and subsequent lower gross profit is compounded by higher operating expenses and an increased interest charge.

CFO Ami Sharma expanded on the financials for me by referring back to what had been a highly lucrative contract for ATIK in China, explaining that the business had been cash paid up front which was very beneficial to the company, being held on the balance sheet allowing stock to be built up before release.

Although that business was excellent for SDI whilst it lasted, Sharma says that it is now very much back to normal with that one off distortion having gone.

He adds that free cash flow should now track profits, which sees FinnCap forecasting that the free cashflow will be circa £8.1m for the full year 2024. Sharma concludes that they have the cash to do a couple of smaller acquisitions

CEO Creedon is also happy to expand on the latter aspect and echo Sharma's sentiment on acquisitions, where he confirms that the next one or two bolt-on-buys will be delivered from the companies own cash resources as opposed to using debt.  

And on this front, he says that he is currently actively looking at a few exciting prospects, being confident in delivery in due course.

Speaking of the group itself, Creedon highlights Applied Thermal Control as going particularly well, along with Graticules, whilst Monmouth Scientific which has seen an overhaul of the management team is also now pleasing him.

Commenting on ATIK, the CEO has nothing to add on the now concluded Chinese related business and is more interested in touching on the future prospects.

Here, he tells me that in association with Synoptics, it has been trialing its new CMOS cameras with some major industry players through targeting the gel documentation space where Synoptics is already extremely active.

The ATIK team which has seen extensive investment is keen to break into this market and although It is obviously early days, the potential and opportunity would appear to be a significant one for the business across areas such as the molecular biology laboratory space..

Until very recently most digital Gel Documentation systems capable of imaging CL subjects have used cooled CCD cameras which were developed over fifty years ago. Whilst that tech is said to be very good at what it does, inevitably things move on and the more recent CMOS image sensors are now increasingly replacing CCD in most applications, although it does apparently have a few drawbacks against CCD.

ATIK launched its own camera last summer, in the form of  the ChemiMOS; which is a new cooled CMOS camera that is optimised for long exposure imaging, which is an aspect that has previously only been available with the CCD technology, so it will be interesting to see what progress is made on this front.

Although the name of China in an SDI context may now appear to be confined to the past, Creedon informs me that he will actually be jetting off there in August and on business as opposed to pleasure.

He tells me that one of the more recent acquisitions in the form of Fraser Anti Static has an office in China where it has customers generating revenue and where he believes that there could be scope for leveraging other aspects of the SDI group for new growth opportunities.

Fraser opened that office in 2017 and given it is already well established, coupled with China having reopened post the pandemic, then there could be some real opportunities ahead across the SDI Group.

Overall, it appears that the company's businesses are going well given the economic headwinds and the board members sound a positive note on further growth and additional acquisitions ahead.

Indeed, the recent purchases of LTE Scientific and the previously mentioned Fraser look sound buys, with FinnCap now expecting a £3.3m revenue beat from them in the current year on previous forecasts, which will see a circa £18m revenue figure.

Commenting on the future, Chairman Ken Ford, says that the goal remains the same in continuing to build and plan ahead in order to grow the business into a sizeable operator across its space and with longevity.

SDI shares are currently trading around the £1.49p mark, which although on a PE based valuation of 20 may look up with events, it remains attractive against industry peers and continues to have much going for it given the differing, yet complementary aspects within the group.

Both CEO and CFO bought shares on the day of the update, which although arguably not huge in numbers, are nevertheless positive in my view.

Clearly, some will point to the CEO’s previous significant sale and sells from other Directors too.

However, it is something that always needs to be looked at in a greater context, such as both Ford and Creedon providing SDI with much needed short term financial support back in the very early days of this journey, along with Creedon’s ongoing frankness regarding not buying shares.

Additionally, Ford sold some 250k shares back in 2019 at circa 80p, which was actually followed by a succession of upgrades from SDI and which in turn resulted in the share price hitting an all time high of more than £2.00 per share.

No doubt there will be some that will have departed from the journey last week, whilst others will be sticking tight given the overall highly impressive story to date.

Very few companies enjoy the ride northwards without some bumps and hazards in the road and to that end SDI has no reason to be any different.

In the big picture though, the business for me remains one to continue to be invested where management can go on delivering on the growth front and subsequently further shareholder returns.  

I will be speaking with management again on or around results day and will add a more in-depth write up then.