SDI GROUP - CATCHING UP - 10/06/21

It has been a little while now since I last penned something here on my longest standing holding SDI Group, so I feel now, is an ideal time for a catch up.

This comes on the back of further positive news from the company just last month in the form of a pre-close update to the market along with my once more catching up with Chairman Ken Ford and CEO Mike Creedon.

Additionally, I have also spoken with one of another double act from a business within the group, that being Kate George at Synoptics who along with Claire Hough have been doing some sterling work there.

Whilst many investors are really much more interested in the number crunching end of the business, I do find taking a closer look at the mechanics and moving parts of SDI is of significant importance too.

To that end I am taking a closer look here at Synoptics, the longest standing constituent of SDI, along with Monmouth Scientific, a more recent arrival into the fold.

Firstly though, it is worth just recapping on the forthcoming full year 2021 results due out next month, where the numbers were flagged recently.

These were extremely impressive and came out ahead of the previous excellent upgrade announced in February of this year as Chairman and CEO tell me that the company is going well and firing on all cylinders.

As a result, broker FinnCap has pencilled in full year 2021 revenue of £35.3m with EBITDA of £9.3m providing for adjusted pre-tax profits of £7.4m with EPS at 6.1p.

Although for now, the forecast for the financial year in progress remains unaltered, the broker comments- “Although we are making no changes to forecasts for FY 2022 at this time, we consider this to be very encouraging and assuming restrictions continue to ease in line with expectations and business trading returns to normal levels, there could be scope for further upgrades. On this basis, we expect SDI to deliver revenue and EPS growth of +19% and +16% in FY 2022”.

Aside the current prospects of the group businesses which clearly look healthy, it seems likely that SDI will add another business into the fold at some point during the year, which would no doubt assist future numbers.

Nothing guaranteed on that front, but both Chairman and CEO inform me that they are continuing to be active on this front in pursuing suitable acquisitions.

To date the purchases have been shrewd, well timed and achieved at decent prices, the most recent of which, although only small (Uniform Engineering) looks to have been executed at an excellent figure.

Within the now enlarged group Cambridge based Synoptics has also been doing well, continuing its more recent trend of delivering on profits and providing products to the health/pharma/medical research industries.

Given the current pandemic dominated climate Synoptics appears to be well placed, particularly given that recent increased spend across the areas it serves looks set to continue for the foreseeable future.

Within the Synoptics trading entity there are other specific brands those being Fistreem, Syngene and Synbiosis all of which appear to complement each other with various synergies but are run as singularly.

Having previously spoken with Claire Hough at the business, I have this time been able to chat with sales and technical director Kate George, in order to hear how this arm of SDI is performing and what it has to offer.

Kate says that Synoptics has just presided over its best delivery of profit that it has ever had and that result has been fantastic for the team, which will no doubt resonate with SDI shareholders.

As part of that Fistreem, a water purification business acquired in 2018 and which relocated to the Cambridge site has played its part, where Kate says that they have had a very successful year, with things going really well.

In what has been the first full year since the relocation, Fistreem exceeded budget and has delivered a pleasing performance.

Clearly, given the nature of the Synoptics products and services it has been something of a winner in these strange Covid induced times, although Kate tells me that when Covid arrived, like other businesses, there was a high level of uncertainty.

She says that at first, they just didn’t know what to expect and how things would play out, but after that early level of unease the business soon picked up.

This resulted in the last eight months of full year 2021 seeing Synoptics as a whole, exceeding its budget for both sales and orders and that trend has carried through with the first month of the new financial year, which also performed ahead of budget.

Looking at some of the products which it both develops and provides the AutoCOL colony counter from Synbiosis is arguably worthy of particular attention, not least as it sells in a range of £75k-£100k which is a tidy sum.

This product which was only launched in 2019 and follows on from the companies ProtoCOL offering, which is a semi-automated counter that has been used by microbiologists in the Oxford Vaccine Group at the University of Oxford.

Colony counting is undertaken across various areas of medical research including the development or testing of vaccine’s, so the product looks to be the in the right place at the right time.

Historically, the counting has been done manually which is both slow, laborious and prone to a degree of error, so the advent of the ProtoCOL which has been regarded as the gold standard paved the way for significant improvement.

Although the ProtoCOL is still being sold, the AutoCOL looks to be an even more attractive offering as whereas the former still requires a manual loading, the latter as the name implies is fully automated, which means it can be left alone to do counting and provide the accurate results.

Indeed, it has the capability to increase plate reading productivity by over 700 percent. The system can analyse around 260,000 plates per year, over seven-times more than an average technician reading 36,400 plates annually (at an average 300 plates per day).

Based on this throughput, Synbiosis estimates that in just two years, firms could recover the cost of their AutoCOL, because of their extra capacity to take on additional testing work and contracts, without increasing their headcount.

Kate George tells me that it is now selling worldwide with a few having been achieved in Europe and the US along with the Far East and this has been achieved without the ability to have face to face demonstrations.

The product she adds, came about as a result of their being constantly asked about an automated counter, which suggested that demand was certainly there.

Kate says that they felt it was well worth developing and bringing in such a high end product and it was a market she knew so well having worked in it for so long.

The arrival of AutoCOL to market would appear to personify what George and Hough have brought to Synoptics in turning it around from a business that was break-even at best and lacking on growth in numbers.

Kate tells me that when they joined Synoptics it was very much a declining business that was in a reactive mode, that saw it offering a lot of products, but which actually resulted in them selling a little of a lot.

She adds that the range was almost out of control, so they set about a streamlining exercise that saw them dropping products and instead focus on what was required and which were ranked in ranges.

This saw them providing high-mid and lower end products to existing and potential customers and those decisions taken are clearly now bearing fruit.

Kate also tells me that in some, they elected to remove some moulded parts that didn’t impact on the product but aided appearance and improved margins.

There was also an upping of the presentation and marketing of the products which have also contributed to the turnaround of the business originally spun out of the University of Cambridge.

There are of course other aspects of this SDI arm playing a part in improving revenues and profits and that includes the Chromazona product.

This has been designed for the clinical market where it has the ability to measure antibiotic susceptibility plates and interpret them according to the EUCAST or CLSI guidelines.

It is another important area, where given the current and ongoing concerns around antibiotics it appears to be another positive, if smaller string to the bow.

Kate says that there are some big players in the market serving super labs with what can be a million pound offering, so they are targeting the mid range where end users may not have a big budget but are still doing some intensive testing.

One of SDI’s more recent purchases has been that of Monmouth Scientific based in Somerset which was acquired in December of last year for a total cost of £6m.

The company is a manufacturer of fume cupboards, biological safety cabinets and clean rooms, all of which have been seeing strong demand.

Although I haven’t spoken with anyone at Monmouth it appears the company is working at full capacity where judging by its Twitter feed it is continuing to see strong demand.

Additionally, later in the year it will move to new premises at Peninsula 23, a mixed-use scheme located in Bridgewater which will provide the company with a 50,000 sqft modern operation.

Monmouth has clearly been very active across the UK delivering its products which have to meet stringent requirements in a market that looks set to remain strong, given the current climate.

Indeed, since March according to the company website it has delivered 208 class 1&2 biological safety cabinets which has seen 80% of its in-house capacity focused on this area.

Amongst some of its numerous recent projects, the business has delivered to Addenbrookes Hospital here in Cambridge along with the University’s department of plant science and DAM Group’s Liverpool Covid testing facility.

The business isn’t however confined to the medical field as it also provides its product range to the likes of industry and engineering, so as the economy opens up it should continue to experience positive demand.

SDI as many will know has been and remains a long term holding for me and despite the shares hitting a recent two pound level, retains the ability for further longer term upside.