Ann: December 2012 Profit Upgrade , page-3

Well, Mea Culpa from me: I under-gauged somewhat dramatically in modelling SDI's FY13 profitability.

My NPAT forecast for FY13, before this latest update, was a paltry $3.45m. This compares to the “$4m to $5m range” expectation of the SDI board.


Before I get too excited about this “ripper” of an upgrade, I feel I need to understand what has driven it.

I mean, when a board expects NPAT of $1 to $2m at a given point in time, and then a mere 10 weeks later, it is discovered that NPAT has actually come in 10% above the upper limit of those earlier expectations - and almost 50% higher than the mid-point of your expectation range - then something significant is clearly happening within that business.

It is critically important to me to understand what it is.

I suspect that one of two forces - possibly both together -are at work here:

1. The haemorrhaging of the Brazilian business has been slowed (Recall that this business lost a whopping $2.6m at the Pre-Tax profit level last year, which alone was more than actual reported Pre-Tax Profit of $2.2m)

2. SDI is adjusting its price list to play catch-up with the silver price which had risen over the preceding few years (Recall that Gross Profit Margins for SDI were in the mid- to high 60% levels for most of its history, but fell to the high-50% level from around 18 months ago as a result of the four-fold rise in the silver price between 2009 and 2011)

My suspicion is that SDI management have put through significant price increases during the back end of 2012, which will explain why constant currency sales for the half, at 2.9%, is a bit slower than the usual clip of 6% to 8%.


The other aspect of this updated guidance that I find really interesting is that the mid-point of the full-year NPAT guidance, namely $4.5m, is about double the unaudited DH result.

This is at stark odds with the seasonal history of the business, where the June half is always MATERIALLY stronger than the December half.

To wit:

NPAT by half-years ($m)

DH03: 2.48
JH04: 5.55
[JH:DH ratio = 2.2x]

DH04: 0.66
JH05: 2.32
[JH:DH ratio = 3.5x]

DH05: 0.86
JH06: 4.26
[JH:DH ratio = 5.0x]

DH06: 1.26
JH07: 2.80
[JH:DH ratio = 2.2x]

DH07: -0.65
JH08: 1.77
[JH:DH ratio = Infinite/Not Applicable; DH was a loss]

DH08: 1.43
JH09: 1.69
[JH:DH ratio = 1.2]

DH09: 1.49
JH10: 1.99
[JH:DH ratio = 1.4x]

DH10: 0.45
JH11: 0.76
[JH:DH ratio = 1.7x]

DH11: 0.31
JH12: 1.65
[JH:DH ratio = 5.3x]

DH12: 2.2 (unaudited)
JH13: 2.3 (mid-point implied by recent management guidance)
[JH:DH ratio = 1.0x.....???? Completely out of step with precedent!]


So if I conclude – which I have – that the stock is due for further upgrades in the current half, it is based on more than a mere hunch; it is based on unbroken precedent.

So, what does this mean for valuation then?

Well, assuming they earn around $3m in the JH, that would put the stock on a full-year EBITDA and NPAT of $9.5m and $5.3m, respectively.

That throws up a P/E of 9x, an EV/EBITDA multiple of 5.5x and a FCF yield of 8.9%

If the major dislocations of the past few years of the GFC, and the upward momentum in the silver price and the Australian dollar, are now neutralised as the acute headwinds they have been for the past 2 or 3 years, then SDI could be on the cusp of repeating its peak profitability levels seen in the mid-2000s.

While it is likely to be a lesser-known fact, canny readers of this post will have noted that my FY13 NPAT forecast of $5.3m – if it indeed proves to be correct – will be the second-highest profit on record for SDI (behind the $10.6m reported in FY2004, immediately before the company commenced investing in an international expansion)

My $5.3m forecast of NPAT is in line with the $5.2m reported in FY2006.

It is interesting, I think, to consider that the share price averaged 80c during that period.

I find it a useful reference point that places SDI’s share price moves in recent months into some sort of clinical context.

The business looks to me to be in the best shape that i hs been for several years, and I suspect that as the price increases gain acceptance in the market, that FY14 will end up being another excellent year for growth.

Prudent Investing

Cam