focusIR May 2024 Investor Webinar: Blue Whale, Kavango, Taseko Mines & CQS Natural Resources. Catch up with the webinar here.
London South East prides itself on its community spirit, and in order to keep the chat section problem free, we ask all members to follow these simple rules. In these rules, we refer to ourselves as "we", "us", "our". The user of the website is referred to as "you" and "your".
By posting on our share chat boards you are agreeing to the following:
The IP address of all posts is recorded to aid in enforcing these conditions. As a user you agree to any information you have entered being stored in a database. You agree that we have the right to remove, edit, move or close any topic or board at any time should we see fit. You agree that we have the right to remove any post without notice. You agree that we have the right to suspend your account without notice.
Please note some users may not behave properly and may post content that is misleading, untrue or offensive.
It is not possible for us to fully monitor all content all of the time but where we have actually received notice of any content that is potentially misleading, untrue, offensive, unlawful, infringes third party rights or is potentially in breach of these terms and conditions, then we will review such content, decide whether to remove it from this website and act accordingly.
Premium Members are members that have a premium subscription with London South East. You can subscribe here.
London South East does not endorse such members, and posts should not be construed as advice and represent the opinions of the authors, not those of London South East Ltd, or its affiliates.
Finncap retain their 275p valuation.
They note that even at 275p the share price would still compare favourably to sector comparator JDG's current valuation.
SDI are still on a very decent value multiple, especially compared to its sector comparator JDG which trades on a much higher rating.
Here's Progressive's new note with 9.5p EPS forecast this year:
Https://progressive-research.com/wp-content/uploads/data-sync/research/SDI%2020221207.pdf?utm_source=sendgrid.com&utm_medium=email&utm_campaign=website
Extracts:
"Another strong set of results
"SDI Group has announced strong H1 results to 31 October, with the full year
expected to be in line with market expectations. Total revenue increased by
28.3% to £31.7m and adjusted operating profit by 19% to £6.9m. Despite
increased global economic uncertainty, SDI’s niche businesses, operating in
diverse end markets, have driven overall organic revenue growth of 3.8%.
Safelab Systems and Scientific Vacuum Systems (SVS) acquired over FY 2022
and LTE Scientific Limited (LTE) in the first half of FY23, contributed to the
strong sales growth, alongside the well-flagged, one-off Covid-19 related
contracts within Atik Cameras. Management notes that post-Covid
fluctuations in demand haven’t fully settled, but the general level of sales
enquiries remains strong. Our FY23 and FY24 estimates are broadly
unchanged, with the exception of an increased interest charge given the
current interest rate environment."
"SDI is benefitting from its niche positions and product diversity. Another
strong first half highlights management’s ability to execute its ‘buy and
build’ strategy and deliver outstanding results, despite residual Covid
disruption and inflationary supply chain pressures. SDI is well-positioned to
continue to grow underlying organic revenue and profitability, with a strong
acquisition pipeline underpinned by cash generation and financial strength."
"Summary and outlook
SDI remains focused on smaller niche businesses operating with a high degree of autonomy, allowing a fast response, with good opportunities to consolidate the highly fragmented markets that the group targets. Results with acquisitions so far have been exceptional, delivering strong financial returns and operational synergies. The specialist nature of technical, scientific, and medical and life science market segments offers a significant opportunity for increased shareholder value.
We also haven’t assumed a contribution from potential new acquisitions, which offers upside to our estimates.
The group is in a strong position financially, with good operational cash flows and a solid order book. Management continues to seek targeted acquisitions funded by cash flows from existing businesses and its £6m undrawn facilities, and given strong cashflow we forecast net debt to be broadly neutral by the end of FY24. We believe that SDI is in a strong position to continue to deliver its successful ‘buy and build’ business model."
Encouraging H1 results, with 5.02p adjusted EPS in H1 (up 28%), which puts SDI in a strong position to at least meet expectations of 9.9p EPS for the year.
Particularly as H1 brought two major new acquisitions which will fully contribute to H2. And also because Atik appears to be benefiting from some Chinese PCR camera sales for H2 which I'd assumed would have finished in H1 - these seem to have been paid for in advance but not yet recorded as sales.
The outlook is confident in meeting expectations, and with increased headroom from HSBC there's still a stated appetitte for more acquisitions. Sales enquiries are at a "strong level" and SDI are coping well considering all the current constraints on component supplies, labour, pricing etc.
If these various factors begin to settle down then SDI should be in a position to do even better.
A new post on SDI's subsidiary Atik Cameras' LinkedIn feed - "a massive project" sounds rather encouraging!
Https://www.linkedin.com/feed/update/urn:li:activity:7001942056830918656/
"Atik Cameras 682 followers 2d •
2 days ago
Atik Apx60 industrial cameras being shipped, kicking off a massive project. This challenging task was made possible through well-coordinated teamwork.
Old technologies to be replaced by the state-of-the-art CMOS cameras available. Preparing for the high demand expected on this project and future ChemiMOS partnerships."
Interesting interview with SDI Group CEO Mike Creedon. Always good to hear him speak, very honest and straightforward. I particularly like to him say that the main goal for SDI is to create shareholder value, because the shareholders own the business, and I just run it on their behalf. Obvious stuff, but many CEO's lose sight of this and treat companies like their personal fiefdom. Interview here: https://www.youtube.com/watch?v=AgjT9HffsiE
Pardon me, Chelsea had mentioned it - I had meant to rewrite that.
Creedon does have his incentive plan awards, totalling nearly 900k options by 2025 - I'm not sure I understand those very well but they may be a factor. We're happy that they are a cautious crew, and cautious people don't keep all their eggs in one basket.
Nobody seems to have mentioned the new acquisition https://www.lse.co.uk/rns/SDI/acquisition-of-fraser-anti-static-techniques-ltd-hlxg2dbsyvzwqom.html
Fraser is their largest acquisition to date, profitable now. Martin Flitton seems happy with it.
https://martinflitton1.wixsite.com/privatepunter/post/another-buy-for-sdi-25-10-22
Can’t see too much of a rise in SP if the CEO keeps on selling the bulk of his shares as has happened over the past two years when the SP is around 180 p. Proceeds from the sales are ~£2 million.
RNS (not shown here for some reason) showing chief exec dumping vast majority of his holding at below market price
What caused that ?!
And add another on top…………
Ken Ford, Chairman of SDI said: "The acquisition of Fraser is a further step in our Group growth strategy, demonstrating again the opportunities to acquire businesses with high quality products with export growth potential. The Acquisition is expected to be earnings enhancing in current year FY2023. We are delighted to welcome Bob Fraser, Bruce Clothier and their staff at Fraser to the SDI Group."
Trading Update & Notice of Results fell on 04/11 last year, so similar timing is likely this year.
Will be particularly interesting to see how the multiple acquisitions have performed to date.
Reassuring AGM statement, with a "good" start to the year and trading in line with consensus expectations of 9.2p EPS.
Which leaves the current multiple looking very good value by recent standards, and certainly much cheaper than sector comparator JDG.
This is interesting from the Annual Report. It would seem that SDI should be quite a decent beneficiary from the pound's weakness this year:
"The Group’s principal exposure is to US Dollar and Euro currency fluctuations against Pound Sterling, and in both currencies, we sell more than we purchase and we have a higher level of debtors than creditors. This typically means that a relative devaluation of the Pound results in exchange gains and an improvement in competitiveness, whereas a revaluation has the opposite effects."
SDI's Sentek introduce a new generation of sensors:
Https://www.sentek.co.uk/introducing-a-new-look-for-sentek-electrodes/
"Introducing a new look for Sentek electrodes
Date Posted: 08/09/2022
Available to pre-order today, next generation sensors offer updated features that draw on the years of hands-on experience that have shaped the electrode cap and refill seal, all whilst maintaining the same affordable price.....
.....“We’re thrilled to be launching this exciting new product upgrade which provides our customers with a stylish and reliable sensor” said Kenny Petrie, Sentek’s founder and Technical Director. “At our core, we constantly strive to provide our customers with exceptional quality at a reasonable price, and the features of this new design achieves just that.”
Share price just can't sustain any rise atm. Maybe being played by short-term traders on low volume. Graph for the last 1.5 yrs looks like the spine of a mountain chain. Eventually price will reflect strong ongoing progress and fundamentals. No doubts that long-term holders will be rewarded for their patience.
The IC has released its latest AlphaScreens update researching all listed companies for the quest for quality:
"The holy grail for buy-and-hold investors is to find a business that is capable of generating a high return on capital and sustaining it while reinvesting profits. This screen looks for sharesthat display these quality characteristics and can potentially deliver significant compounded returns over time."
The 9 screening criteria cover RoE, operating margins, P/E, PEG, free cash flow, interest cover etc.
Of all the AIM stocks above £35m m/cap, only around 30 companies pass 8 or all 9 tests. SDI are one of them.
mini judges this is !
SP back to starting with a 2?
More of a When than an If, imo.
Patience will very likely be rewarded, with all the rationale there in the RNS newsflow.
Nice start again today - and another 25k buy just reported at the full 180p offer price.
Looking very strong.
Of note from Finncap's note on the new LTE Scientific acquisition:
"Discussions with management suggest that there are opportunities to expand production in the LTE Scientific factory, which could benefit the production of some SDI products and components and thereby benefit group EBIT margins."
Finncap forecast LST to contribute £0.65m EBIT in the next FY to Apr'24:
"Valuation
We raise our target price by 4% to 275p (from 265p) to reflect:
- The accretion to adjusted earnings (c.3% in FY 2023).
- Comparison with peer group multiples. SDI’s larger peer, Judges Scientific (JDG.LN - £81.50), is currently trading on P/E, EV/EBIT and EV/EBITDA multiples of 25.2x, 18.6x and 17.3x, respectively, to 31 December 2023.
- Correction in the broader equity market, with the AIM index having fallen 24% since the beginning of the year.
Based on our FY April 2023 forecasts, this would place SDI on a FY 2024 P/E of 29.3x, EV/EBIT of 21.1x and EV/EBITDA of 18.2x (Figure 7). Our target price excludes the potential for further acquisitions and given what was said at the recent FY 2023 results, we do not expect this to be the last acquisition in the current financial year. Given the M&A arbitrage that exists between the purchase price (c.4-6x EV/EBIT) and the trading multiple, any acquisition is likely to give rise to further EPS accretion and an uplift in the target price.
SDI Group is a premium stock, built over the past eight years as it has successfully and consistently gone about its business. We consider the premium valuation to be merited through the combination of good organic growth in its operations with accretive acquisitions.
Management has consistently added value through the introduction and integration of new businesses into the SDI stable, also providing them with the capital and capacity to drive incremental organic growth. We consider the opportunity to potentially cross-sell LTE Scientific products with other SDI businesses (e.g. Synoptics’ vacuum ovens ) as well as expand production in LTE’s factory, enabling SDI to bring more fabrication and production of some products in-house. This should drive incremental sales and cost synergies, improving operating margins and ROCE.
With the constant prospect of additive acquisitions boosting the underlying operating fundamentals, the valuation is consistently grown into. Future potential acquisitions are unmodelled."
Spoke with management today and upbeat on the acquisition , the CEO also explaining that they are acquiring at 5 times three years adjusted historical, plus net assets which includes the property.
I suggest those that disagree contact the CEO for further clarification!
Rivaldo,
I'm not ignoring the building. It's an integral part of the business they've just acquired as a whole for £4.2m. You can't just strip it out.
Yes, you could do a sale and leaseback, but that would hurt profits. So, lets assume a 5% yield on the property value (generous imo) of £1.65m = £82k deducted from the EBIT of £383k reported in their 2021 accounts = £301k. £2.65m acquisition cost divided by £301k is a price/EBIT of 8.8, which again looks expensive compared to historic multiples.
I trust management here, they have a great track record, so when they say they'll be able to reduce costs and grow the business I believe them. I'm not saying it's a bad acquisition, I'm just saying that it's expensive.
Progressive Equity Research have also increased their forecasts this morning - they now see 9.4p EPS this year.
They note that:
"Management believes there are long-term growth drivers for LTE’s products and services, and additional synergies such as opportunities to expand production in LTE’s modern facility"
Https://progressive-research.com/research/acquisition-of-lte-scientific-limited/?
SlickMongoose, you can't just ignore the fact that SDI have acquired £1.65m of freehold property as part of this earnings-enhancing acquisition. For example, they could sell and then lease back the property if so desired.