"Thoughts on FY18 Madamswer?
I make it FY17 eps of 4.7c and at current SP of 55.5c it is batting a PE of 11.8 which is bang on its median PE over the last ten years."
@PortfolioPlus ,
Yes, as you say, 11.8x is indeed the average
trailing P/E of the last 10-years, but the variation around that mean is so large (the range is 6.0x to 17x), as to render it almost meaningless as an investment guide, I think:
SDI's Trailing P/E History:
2006: 15.9
2007: 16.6
2008: 15.0
2009: 7.1
2010: 7.9
2011: 17.0
2012: 6.2
2013: 16.2
2014: 12.8
2015: 11.7
2016: 11.3
2017: 11.7
As can be seen for the data series above, the market is decidedly schizophrenic in the way it values SDI, going from ecstatic in some years, to manically depressed, in others.
The other problem with that raw P/E multiple approach is that the company - for much of the period under review - had significant levels of net borrowings (Net Debt averaged 50% of Market Cap between 2008 and 2012). Today the company is essentially debt-free.
At times of ultra-low interest rates, differences in capital structures are not really captured in relative P/E multiples. During the times that SDI has had a lot of debt, when the P/E multiple was at unusually low levels, the EV multiples for the company would not have been as commensurately low.
But the extent of indebtedness is captured in Enterprise Value multiples, so I have listed these below for the period under review:
SDI's Trailing EV/EBITDA History:
2006: 10.9
2007: 9.2
2008: 7.3
2009: 4.4
2010: 4.8
2011: 7.1
2012: 4.5
2013: 8.8
2014: 8.1
2015: 6.2
2016: 5.5
2017: 5.4
While there is still a bit of a range in that series (reflecting how the market falls in, and out of, love with this company over time), at least there is some semblance of a meaningful average.
In this case that average is around
6.8x.
When I triangulate that sort of historical valuation with a first-principles approach to what I would pay for a business of SDI's nature, with all its quirks, its positive and its negatives, including aspects such as:
- its small size,
- its operating and financial track record,
- its market position and geographical reach/supply chain,
- its competitive positioning and its IP portfolio,
- the nature and durability its operating assets,
- its ownership structure and its management,
- its return on capital and its operating margin characteristics,
- the nature of its capital flows,
- the variability of its financial performance,
- its operating risks,
- etc...
... and I look at what multiples businesses with similar "pedigree" are capitalised, then I think that somewhere between 6.0x and 7.0X EV/EBITDA "feels" about right to me.
So this gels quite neatly with the "average" EV/EBITDA multiple that the market has afforded the company over time.
Which is a good segue into your question about what my thoughts on FY18 are.
I tend to not place too much store of value in making explicit financial forecasts; rather, I take stabs at what reasonable outcomes might look like (because it is impossible to be definitive about what exchange rates will do, so too is it impossible to be too definitive about what SDI's financial results for the coming 12 months will look like).
So, if I simply took some assumptions that should pass the reasonableness test, such as exchange rates being what they are, and in the absence of any compelling evidence to the contrary, that they will be in 12 months' time what they are today, then I expect SDI's Revenues will increase by a further 3% or 4% in FY2018, as the fast-growing non-Amalgam products become a proportionally larger component of SDI's sales mix.
Assuming operating margins are maintained, then FY18 EBITDA will come in at around $13m (FY17 looks like it will be around $12.2m, so 6%-7% EBITDA growth).
Based on:
- a further $2m investment in working capital to support the sales growth,
- "usual" capex and investment in R&D patterns (~$2m pa each),
- 45% dividend payout ratio (~$2.7m in dividends),
....net free cash flow after dividends would be approaching $2.0m, leaving the company with a net cash position by this time next year between $1.0m and $1.5m.
[*]
On that basis, SDI's prospective EV, using today's share price, would be $65m and the resulting EV/EBITDA multiple would be
5.0x.
Which to me, looks objectively undemanding a multiple.
The stock has traded below those sorts of levels in the past, but not often and not for very long periods of time. So it could de-rate further from current levels, but I somehow doubt it.
"Cheetham has put a glow on a crappy FY17 result by getting us to focus on the future. But with an AUD approaching 80c I don't see much of a solid improvement. All we have is a "trust me, our R&D will deliver on exciting new products"."
Well, here I do differ from your rather strident view.
Assuming that the $5.6m NPAT figure is reasonably clean, when I put this latest result into the context of the near-perfect storm in which SDI has found itself, namely:
- some of the major exchange rates, that determine its profitability, moving against it,
- its legacy product undergoing a tectonic obsolescence shift,
- one if its major markets undergoing a once-a-generation supply chain disruption, as well as
- the company's Revenue and Earnings cycling off a base in FY2016 that represented record highs,
....then I think that $74m in Revenues and $12m in EBITDA is a commendable result under the circumstances.
And the fact that JH17 Revenues are at a new record high is quite noteworthy, I think.
Viewed another way, compared to FY2015's (i.e., the one preceding the record FY2016), FY17's Revenues are some 8% higher and FY18 EBITDA is on a par, despite the drag from lost Amalgam sales over those two periods.
I suspect that very few companies, had they experienced the sorts of extraneous shocks that have befallen SDI over the past 12 months, would have delivered equal-record revenues and second-highest Operating Profits on record.
So, I think that "crappy", when describing this result, is not the sort of descriptor the fits the result when it is taking in context of the circumstances.
Your interpretation of the message from management is one of "trust us, our R&D will deliver on new exciting products"; yet based on the actual results being delivered in terms of those "new" products - not just in the current result but in the past few results, too, I'm not sure saying that it is all just "trust-me" execu-speak is accurate.
As a case in point, in local currency terms, sales of Aesthetic products (which are now more than one-third of total SDI Revenue) grew by 12% and Whitening products (a quarter of group Revenue) grew by 7% in the past financial year.
Don't get me wrong, I am no apologist for SDI; it has many failings, but an inability to reinvent itself when its world changes is not one of them, I don't believe.
It wouldn't have lasted for more than 40 years if that was the case.
Finally, on the all-important factor of exchange rates for a company like SDI, which is a significant offshore earner, you are absolutely right; if the A$ goes above 80c and beyond, SDI's share price will certainly not go up.
Trouble is, I have no unique insights into what macroeconomic variables such as exchange rates might do over any given week, month or even year, so I don't invest on the basis of forecasting them. Heck, the A$ could go back to 0.90 against the US dollar next week, or the Chinese economy could stall tomorrow which would pretty smartly see the A$ down at 65c. Who really can tell?
All I know is that, through the various exchange rate cycles, SDI emerges more profitable and stronger than at the same corresponding points of previous cycles; for example, when the A$ was last at the 75/76c level, namely around 2007, the company generated Revenue of less than $50m, EBITDA of around $8m and EBIT f $6.5m. It had net debt of around $10.0m at the time.
Today, at a very similar exchange rate, the company's Revenues are close to $75m, EBITDA is $12m, EBIT is $8.0m and the company has no net borrowings of which to speak.
And remember, that outcome has transpired while the company has been experiencing some significant headwinds in terms of structural decline in one of its core legacy products in recent years, as well as it having fallen off the horse (a self-inflicted accident, possibly) in one of its major markets (the US).
It is this kind of "through-the-cycle" earnings dynamic that attracts me to a business such as SDI, as opposed to the short-term zigging and zagging of exchange rates, which I leave for others to predict.
[*] Calculating FY2018 Capital Flows (all figs in A$m):
EBITDA = 13.0
Less: Increase in Working Capital = 2.0
=> Net Receipts = 11.0
Less: Net Interest = 0.2
Less: Tax = 2.4
=> Operating Cash Flow = 8.5
Less: Capex = 2.0
Less: Intangibles = 2.0
=> Free Cash Flow (before dividends) = 4.5
Less: Dividends = 2.7
=> Free Cash Flow (after dividends) = 1.8
Net
Debt @ 30 June 2017 = 0.5
=> Net Cash @ 30 June 2018 = ~1.3 [Forecast]
- and I'm glad you did.
