SDI GROUP - FILTERING OUT THE STATIC - 30/08/21

Regular visitors to the blog will no doubt be aware that SDI Group has featured here on a regular basis, which is no surprise given it stands as the largest holding in my portfolio. With the AGM coming up next month I had planned to wait until then before adding some further comment, however, given the wild gyrations in the share price last week which resulted in a few emails from some other holders coming my way, I thought now may be a good time to pen something.

Since investing in the Cambridge based company, I have witnessed some ups and downs over the years with the share price, the ups pleasingly far outweighing any pull backs along the way to the current price. Last week however, saw some rather strange activity on this front, the shares retracing sharply on Tuesday 24th August, which at one point resulted in the price falling to circa £1.52p.

Reassuringly, the drop was short lived, the shares bouncing back impressively and closed the week at £1.90p after investors cottoned on that there was nothing nasty lurking and that SDI had perhaps merely succumbed to the silly season that often prevails, throughout summer. A number of private investors obviously took advantage of the opportunity to either add or buy in, whilst Danske Bank also increased its stake to 4% of the company, which can be viewed positively.

On a personal level, I didn’t add further as SDI is, as mentioned previously, already my largest holding. Having said that, I was watching the situation closely, not least as I had only visited the company the previous week. To that end, I was somewhat perplexed by the retrace and also viewed some of the various bulletin board posts with an amalgam of bewilderment, concern and frustration.

Sure, SDI has been trading on a fairly premium rating for sometime in recent months, but deservedly so, with the board spearheaded by Ken Ford and Mike Creedon delivering on a number of fronts with a commendable track record. At this juncture, it is perhaps worth adding that there is nothing wrong with investors taking a piece off the table and leaving something for the next man, it is after all what makes the market tick.

Or, for that matter, I hasten to add, Investors sticking to their own self imposed stop loss which works very well in specific circumstances.

But, last Tuesday as the shares began to fall sharply, a number of posters espoused their various thoughts and theories as to what was going on, which naturally caught my eye.

These ranged from an imminent warning being on the cards, to the company now effectively being ex-growth, along with a reference to one of the brokers covering SDI as having the stock down as a strong sell.

Clearly a number of holders decided to exit, perhaps based in part on the above fears or for other reasons, which in turn opened the door for buyers to move in.

Regarding the negatives or concerns that were expressed, each in my opinion are frankly wrong, as there is no warning imminent, SDI cannot be considered ex-growth, and the sell as highlighted on the Stockopedia site is - I am confident - actually an error. The area above is worth touching on, as it demonstrates what happens within a herd, particularly when individuals rely solely on information or opinions from other sources, often succumbing to the fear factor.

I like to think that people visiting here find my scribblings of some use and perhaps can assist them in conjunction with their own research when making an investment decision, so let’s take a closer look at the current SDI position from where I see it. For starters, I would like to refer back to my recent visit, where I met up with CEO Mike Creedon along with Kate George of the Synoptics arm, a very useful exercise and something I have been fortunate enough to conduct over the last several years. Mike informed me that the businesses across the group were going well, whilst he also added that the Graticules performance was proving particularly pleasing.

He also confirmed that another very small business had been acquired, but due to the size it did not constitute an RNS, this comes in the form of Clean Tents which looks as though it could be ideal for some kind of tie up with Monmouth Scientific. Sticking with the acquisition theme, the CEO reaffirmed that SDI remains firmly focused on further bolt-on-buys and that he is confident on seeing at least one more acquisition of note before the end of the year.

The latter is a key point within the investment case here, as for now, broker FinnCap has set its 2023 numbers at a level that does not include any numbers from further additions to the group.

Given the board's excellent performance in this area to date, it is extremely likely in my opinion that there will be not merely one addition, but quite likely two within the next year, which would be earning enhancing to the wider group.

Importantly, Mike stresses that at present such buys can be financed from their own cash resources with the added option of a little bit of debt if required.

Therefore, there is no need to go back to the market in the foreseeable future, although as an investor I wouldn’t personally have an issue with a placing, if it was for a specific opportunity.

That said, the board here is both cautious and savy, so biting off something much larger than has been the norm would seem unlikely. On the trading front, at present the strong performance from ATIK has assisted in the guidance for full year 2022, which comes on the back of Covid related business relating to a Chinese OEM.

Quite rightly, SDI does not assume that ATIK will win further business in this area with the OEM moving forward, although it must be said that it remains possible.

Equally, it is feasible that business could also be won from another OEM across the space and that is something that the company is looking to achieve.

Setting that aside though and assuming a negative for further ATIK wins in this area, the FinnCap numbers in the market for 2023 still look on the conservative side, particularly for the reasons outlined earlier regarding further acquisitions.

It is also worth noting the performance of the group as a whole which appears to be trading well, as markets have increasingly opened up once more, so organic growth could also head northwards.

Indeed, speaking with Kate George it is clear Synoptics, which now includes the Fistreem business has been resurgent, turning in a £1m profit last year proving an excellent result.

As part of my visit, I was treated to a demonstration of the highly impressive AutoCol colony counter product which sells in a range of £75k-£100k and is already being sold across the world.

It is a decent price in revenue terms and Kate sounds enthusiastic and positive on the product, informing me that sales have been achieved without a physical demonstration, which is arguably a testament to the strength of the product offering.

Additionally, she says that it is also currently being trialled by a couple of major Pharma’s which if proving successful could pave the way for further sales and an increased awareness.

Taking note of the CEO's positive reference to Graticules, it is perhaps worth shining a brief light on this arm of the group, which is actually a very long established business.

As with SDI's more recent purchase Monmouth Scientific, Graticules is going through a period of investment and expansion, where like Monmouth, it serves in part markets across the pharma/ medical research space which are seeing increased spend and interest. As part of its various offerings, Graticules produces TEM grids which are flat discs with a mesh which has shaped holes that are used in electron microscopy.

The latter is a technique that is used for obtaining high resolution images of biological and non-biological specimens and has been, and continues to be used in research regarding Covid.

Aside the medical field, Graticules also enjoys exposure to the defence markets along with quality control which sees the latter taking in asbestos analysis.

Unlike some buy-build businesses SDI has strong synergies across the group, which in turn makes for potential to increase sales with new and existing customers, thus driving organic growth over time. Regarding broker ratings, FinnCap has reiterated its £1.95p target price installed at the time of the full year results, whilst Progressive also has a positive stance on the stock. I’m not aware of a third broker covering SDI, hence my confidence in the view that the Stockopedia reference is actually an error. Looking ahead, I am hopeful of attending the AGM in September here in Cambridge, providing circumstances permit and if so, look forward to once more catching up with other holders of SDI shares.