STICKING WITH SDI GROUP - 10/08/23

An old favourite and long covered company here SDI Group, delivered its preliminary results earlier this week which has resulted in a further drift southwards for the share price, which now sits around the £1.12p mark

This comes despite the company delivering results in-line with expectations, whilst also adding that the current year has commenced well and is on course to meet the numbers out in the market.

One niggling aspect contained in the results announcement however, was a non-cash impairment charge related to the acquisition of Monmouth/Uniform which clearly didn’t help sentiment that had already been matching the market mood.

In terms of the actual numbers, SDI saw revenues increase 36% to £67.6m with acquisitions not surprisingly playing a key part of that.

This resulted in adjusted pre-tax profit rising 1% to £11.8m. with adjusted fully diluted EPS increasing by 4% to 9.1p.

Clearly, as previously mentioned by the company and covered by myself here on this blog, the big profit flowing multi-million pound contract enjoyed by ATIK has now come to an end, so the numbers going forward for the near term at least reflect this.

That said, catching up once again with both Chairman Ken Ford, CEO Mike Creedon and CFO Ami Sharma the mood remains cautiously optimistic with all expressing a firm confidence in hitting the current full year 2024 guidance.

Indeed, across the group, levels of business are currently running positively and in line with budget I am informed, although given the nature of the macro economy uncertainties and the remainder of the year yet to run, management here are wisely sticking to the current market forecasts. 

This should allay any near term concerns for investors, where there doesn't appear to be any worrying profit warning in the offing.

SDI, as other watchers or holders will be aware, has enjoyed a great run on the share price front over the years and whilst some may view the recent sharp retrace as perhaps signaling something more untoward, those of us who recall the very early days here, are arguably inclined to be more relaxed.

Certainly, buy-build operations don’t go up in one direction and there are other great success stories out there that have endured their own fair share of hiccups along the way, which is par for the course.

Both Ford and Creedon acknowledge that the current economic environment is certainly a tough one, but despite this, the Group is weathering the storm, with some arms going great guns.

I am told that Safe Lab, a more recent acquisition is performing extremely well, whilst Applied Thermal is also accelerating with increasing business from both Asia and the US.

Monmouth Scientific also appears to be overcoming the problematic issues endured, with a complete management refresh where it is now operating well and on track to deliver half a million of profit this year.

Like most businesses, SDI is also looking at cost savings as able and applicable, whilst also driving synergies, where in the case of the latter I am told there are a few interesting initiatives going on at present revolving around the Canary Wharf Life Science development.

There is no further elaboration regarding this or on ATIK though, where with the Norwich/Lisbon  operation there are a few things related to CMOS Cameras in play, although both Ford and Creedon,  wisely are not relying or expanding on that at present.

Perhaps one of the frustrating things for both shareholders and management alike, is the lack of further acquisitions being delivered at the current juncture.  

But, this it appears hasn’t been down to any financial or strategic constraints or issues, more a case of various protracted red tape, which should  see at least one deal concluded in the near term, with a second likely to follow soon after.

Having engaged with management here for some ten years now and been invested for almost as long, I continue to believe in the story and feel there remains a significant runway ahead.

Looking at the current year, Broker FinnCap has cited revenue of £71m to deliver EBITDA of £13.3m and an adjusted pre-tax profit of £9.8m, which would deliver EPS of 7.2p.

That implies the shares trade on a PE of circa 15 falling to 13 based on current 2025 forecasts, although the latter doesn't make any upside to earnings that further acquisitions would clearly bring.

On that basis and compared to peers the shares to my eye at least, look decent value given the long standing track record of management and the prospects of further growth and expansion.