Ann: Media Release December 31 2018 Results, page-15

@Matt48

For most companies, cutting and slicing and dissecting each individual financial result might inform investors of the what determined each of those particular results, and where they varied from expectation, but often individual profit results contain a lot of irrelevant "noise" which serves as a distraction from the broader - and infinitely more important - path of shareholder value creation (or destruction, as the case may be) being followed.

For fewer companies is this truer than SDI, whose individual profit results tend to be whipsawed around by unpredictable extraneous factors such as exchange rates, timing of large orders, economic and political issues in certain parts of the world, etc.

Just about every SDI result in the past decade has had some or other individual positive or negative factors (often at the same time) impacting it. which causes the market to either become alarmed, or exuberant, depending on the circumstances.

In some results Brazil has been the problem; other times it is the strength of the A$, or the silver price. On other occasion it was Brexit that had an impact on shipments; another time a de-stocking exercise on the part of a major customer in the US caused people to worry; another time the loss of the sales manager in north America was to blame. In recent structural decline in amalgam has been the negative factor causing anxiety. There has always been something.

And as sure as anything, in future SDI financial results there will again be things that can cause one to become concerned and anxious, if one is so inclined.

As it happened, latest result was boosted by one or two major extraneous factors (unrealised forex gain, one or two large amalgam orders which might not recur in subsequent periods) that I think flattered the financial performance of the company, by as much as 25%, at the Pre-Tax line.

Still, even stripping out those one-off benefits, Pre-Tax Profit was still some 140% higher than pcp.

But then again, pcp was a particularly weak half (itself impacted by a few one-off, but only negative ones that time). (Some might recall the stock falling to 45c off the back of that result, which I think reinforces the argument of the perils of over-interpreting individual profit results. Sure, the A$ weakened since then, but still...)

And all this is why I think one should avoid becoming overly animated with the "was-this-latest-result-a-miss,-or a meet,-or-a-beat?" type of analysis paralysis, because it is impossible to know what single factor or two might impact the next result. And the one after that, etc

That has proven to be a fool's errand for most stocks, and particularly so in SDI's case.

Instead, when it comes to long-duration growth companies such as SDI, the following picture is where I reckon investor focus should be transfixed:



Compared to today's $80m pa Revenue run-rate, SDI has installed capacity to service a Sales Revenue line of $125m to $130m, based on my discussion with the company's operational management, and including some minor de-bottlenecking exercises.

At likely EBITDA and EBIT margins of, respectively, 20% and 15% when Revenues are $125m (this year, on Revenue of ~$80m, those margins will probably come in at 19% and 14.5%, respectively), that will equate to EBITDA of ~$25m (my FY2019 expectation = ~$15m), and EBIT of ~$19m.

At that level of operating earnings it is very unlikely that SDI will continue to have an Enterprise Value of around $90m.


PS. The special dividend declared today is an eminently sensible capital management strategy, for a few reasons, but especially because I think it portends the board implicitly committing to a progressive dividend strategy which, if they are successful in that in coming years, will be something that will likely re-rate the stock.

And on the subject of special dividends, stand by for another one of them at the full-year stage, because SDI is currently sitting with the enviable, high-quality problem of generating more capital than the company is able to consume.

Despite operating cash flows being seasonally weaker in December half years, in the last half-year, the company's Net Cash positioned was unchanged at around ~6m, despite a 24% increase in PP&E spend and a 33% increase on Intangibles, and also finishing the period with a $2.9m higher level of inventories compared to the start of the period.

The current half is the seasonally stronger half, so even after the special dividend which will be paid in coming weeks, SDI will still end up with a yet higher cash balance at the June 2019 balance date.

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