Ann: Preliminary Final Report, page-14

On your EBITDA forecast of $14m you are forecasting FY19 revenue at $86m...presuming no improvements in margins (and obviously this is possible).That's around a 15% y-0-y improvement when this years comparison is just 0.6%. I just cannot see where such an increase will come from. Yes, US sales will/should show a healthy improvement because of the exchange rate alone and if they tidy up the increase in USD terms this should contribute healthily. Brazil continues to be a non event...perhaps even a distraction. Europe and Australia are somewhat range bound."


@PorfolioPlus,

On the contrary, I am only forecasting a 7% increase in Revenue in FY2019, to $80m.
This 7% figure derived by a modest increase constant currency terms (2%/3%), and the rest being exchange-rate driven (my making no assumptions that the A$ will be anything other than it currently is against the US$, GBP and Euro).

(Note that, in constant currency terms, revenue growth in the second-half was 2.3%, compared to a 1.5% reduction in the first-half. Remember that, arithmetically, as the part that is a negative drag on growth, i.e., Amalgam, naturally becomes a smaller part of the whole, the impact of that negative drag is diminished, and the growth rate of the whole increasingly tends to the growth rate of the faster-growing parts.)

So, I don't think I am making too many really hairy-chested assumptions on the Revenue front.


The problem with your assessment, I think, is that it assumes no margin improvement in FY2019, which is at odds with precedent whenever the A$ weakens which, fiscal year-to-date, it has done by some 7% versus the rate that prevailed in FY2018.
(Recall that this company has virtually 100% of its operating assets in Australia, and it exports 90% of all that it produces, so the currency impact is not a trivial thing.)

The correlation over time between the A$:US$ rate and the company's Gross Profit margin is shown in the chart below. Note that the Gross Margin in JH2018 was 62.6%, up from 59.3% in DH2017 (represented by the two red points).

My forecasts assume a 62.0% Gross Margin in FY2019, up from the 61.1% reported in FY2018; which does not seem to me to be way out of kilter with precedent, and especially not in the context of the rapidly changing product mix, which is seeing the sale of differentiated, SDI-branded, higher IP products (aesthetics) eclipsing the sale of commoditised Amalgam products.





So that ~100bp Gross Margin increase, combined with the 7% increase in Revenue translates into a $4m increase in Gross Profit.

I am cognisant of the ongoing need for a meaningful international selling and marketing effort, so I haven't assumed anything in the way of fractionalising of the fixed cost base of the company, by the additional Revenues. So Cost-of-Doing-Business to Sales (despite the fact that the weaker A$ will fractionalise the Australian-domiciled fixed costs) is assumed to remain constant which, some might argue, is a somewhat conservative stance.

So, Fixed Costs are assumed to rise by some 7%, similar to the % increase in Revenue.

This cost increase lops some $2.3m off the $4.0m Gross Profit increase, leaving the net increase in EBITDA at around $1.7m.

Add that $1.7m to last year's $12.2m EBITDA, and you get to my $14m EBITDA figure for FY2019.


As an aside, I'm not a big proponent of the making of highly explicit financial forecasts, because it is a somewhat imprecise science, and can be influenced by all manner of unpredictable extraneous factors.

Instead, what I try to do is to obtain - using assumptions which are not too outrageously ambitious; rather, conservative and modest ones based mostly on precedent - a broad central estimate around which there is sure to be some variance.

So, when I type words to the effect of "SDI's EBITDA of $14m in FY2019...", that's not a definitive decree; it's little more than a best guess which I fully expect will not be 100% correct.

But for what it's worth, here is my current best guess of what the FY2019 P&L might look like:




"Adam, analytically, you've pretty well got SDI on a string."

On the contrary, with so many moving parts, and so many unpredictable variables that can affect this little business, one can only really have a rough idea what they will make, in terms of profits, from one period to the next.

Like a little fishing boat on stormy seas, these guys get tossed about badly from time to time.
But they always make it back safely to harbour, with their catch of fish (i.e., free cash flow).

It is the long-term story that I'm bought into.


(As an aside, I don't know what compels me to write so much about this company, because its not like it represents a very significant proportion of my invested capital. I better stop posting about it for a while, lest I be suspected of being paid to do so!)