"SDI looks cheap IMO, I think we'll see it above $1 in the next two years."
It certainly does look cheap on any measure - both in absolute terms and also relative to its history.
For some context, while revenues have been growing consistently for the past decade and a half (at a CAGR of around 8% pa), fluctuation in margins due to the strong A$ and the silver price between 2005 and 2011 meant that EBITDA and EBIT were under pressure during that period.
But the return to structural growth in earnings has been evident for some time, with FY2015 being the 4th successive year of growth in EBITDA (and hence, NPAT), as shown below:
Significantly, the most recent half (JH2015) represents a record run rate in EBITDA, EBIT, NPAT, EPS and DPS (with the exception of the half-year - FY2004 - which is when the company launched its revolutionary Riva glass ionomer cement product).
It should not be lost on followers of SDI that when the company was last generating profits of the current levels, its share price was close to $2.00.
Having analysed the result in somewhat more detail, I thought I'd take the liberty of sharing some of the salient positives (bouquets) and negatives (brickbats) of the result.
BOUQUETS
Brazil Besides the pleasing (but belated) news that the company now has received official permission to manufacture and pack in Brazil... while it may not have been evident in the full-year announcement, but Brazil was actually profitable in JH2015 @ $337k, a swing of almost $1m from DH2015’s $607k loss.
Investment in expansion capacity Management noted that its manufacturing facility in Bayswater has space for $120m of potential sales capacity. That the company is committing a further $2.0m in capital to automating and expanding its factory is, I think, an indication of the confidence its management has in the demand growth prospects for the group’s products and that a path to $120m of Sales is conceivable.
Dividend The doubling of the final dividend to an all-time high of 1.0 cps is also, I think, an indication of confidence in the company’s future.
Cost Management Cost of Doing Business (CODB)-to-Sales down to a record low of 40.8%, having risen during the early 2000s from mid-40%'s to peak at 50% in JH2009, and then subsequently falling every year since then. This a sign of good cost overhead management while at the same time increasing investment in marketing and representation.
BRICKBATS
GP Margin While the GP Margin in JH2015 is still high, at 60.6% I calculate, this was weaker than recent periods (see below).
This soft GP Margin was a surprise to me given that the weakening A$ over the past 2 years had, until this latest result, helped GP Margins recover nicely from the levels in the mid- to late 50% levels which the GP Margins plumbed to while the A$ hit its record highs in 2011 and 2012.
DH2003: 72.9%
JH2004: 70.0%
DH2004: 57.6%
JH2005: 65.8%
DH2005: 66.7%
JH2006: 68.7%
DH2006: 66.6%
JH2007: 66.7%
DH2007: 62.3%
JH2008: 59.9%
DH2008: 62.7%
JH2009: 61.5%
DH2009: 67.5%
JH2010: 64.1%
DH2010: 61.6%
JH2011: 57.9%
DH2011: 57.6%
JH2012: 57.2%
DH2012: 63.6%
JH2013: 56.6%
DH2013: 62.1%
JH2014: 63.4%
DH2014: 64.1% JH2015: 60.6%
I haven’t quite go to the bottom why this has been the case; I’m not sure if it is a product mix issue or a geographical issue.
But it does not overly concern me because, as can be seen from its history, GP Margin can be a bit lumpy within singular financial years (Note that there is a certain seasonality in GP Margin, with June halves being generally weaker than December halves. For example, DH2014’s GP Margin was notably strong at 64.1%, the highest level in 5 years.)
I think the important thing is that the trend in GP Margins moves in the manner expected, and while one financial period that is at odds with that trend is unwelcome, I don’t believe it is a precursor to a reversal in the trend of improving GP Margins due to the weakening A$.
(For the record, for forecasting FY2016’s financial performance, I make use of an assumption of a GP Margin of 61.5%, which is conservatively below FY2015’s GP Margin of 62.5%, notwithstanding that the A$:US$ exchange rate in FY2016 will most probably average well below 0.75, compared to FY2015’s rate of around 0.92)
FORECASTS AND VALUATION:
My FY2016 financial forecasts are as follows [with growth on FY2015 in brackets]:
Valuation-wise, based on those forecasts, the stock is trading on the following valuation multiples:
P/E = 8.5x
EV/EBITDA = 4.7x
FCF Yield (on EV) = 6.7%
DY = 3.7%
For a company (albeit a micro-cap) with such a long track record of profitability - even during some major external shocks to its business such as the GFC, a rampant A$ and a quadrupling of the silver price – and currently growing its earnings organically at a rate in the high teens, it is difficult to argue that these sorts of discounted valuation multiples are fair and appropriate.
I foresee very little to prevent ongoing improving financial performance over the foreseeable future.
That, combined with the real prospect of a material upwards re-rating of the stock’s valuation multiples, would see the stock price at a level a lot higher than where it is now.
Your $1.00 price target sounds eminently-achievable to my way of thinking.
SDI Price at posting:
55.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
