Hi
@PortfolioPlus,
Your comment about Brazil is relevant, I think, because they have been plugging away there for longer than I care to remember, with very little financial reward in the past decade (although in the early to mid-2000's Brazil was reasonably profitable for SDI... in fact, in FY2005, the Brazil segment recorded $0.8m of Pre-Tax Profit, which was quite meaningful considering total group Pre-Tax Profit of around $3m in that year.)
Based on the woeful profit history of SDI's Brazilian-focused business (see below), I suspect you (like the rest of the market, probably) don't place much store of value in the Brazilian activities.
Pre-Tax Profit from SDI's Brazilian Business (in A$m):
FY2004: 0.3
FY2005: 0.8
FY2006: 0.7
FY2007: -0.2
FY2008: -1.0
FY2009: -1.3
FY2010: -1.0
FY2011: -1.2
FY2012: -2.6
FY2013: -1.1
FY2014: -0.8
FY2015: -0.3
FY2016: -0.4
FY2017: -0.2
This business unit was hit hard during the GFC, and has taken a long time to recover since then, with all profits being re-invested back into growing its top line. The losses have declined over the past 5 years and, hopefully, at some stage of my life it will break even and - who knows? - even turn a profit again one day.
So, while I can understand why it has happened, it is a bit of a pity that Brazil has all but been written off in the eyes of the market because I think there has to be some value there.
The reason I say this is because the trend in sales to Brazil been reasonably attractive over time.
SDI's Revenue from Brazil (in A$m):
FY2004: 2.3
FY2005: 3.4
FY2006: 4.4
FY2007: 4.7
FY2008: 4.8
FY2009: 5.7
FY2010: 5.1
FY2011: 5.5
FY2012: 5.6
FY2013: 4.7
FY2014: 5.7
FY2015: 5.9
FY2016: 5.6
FY2017: 6.6
And because the Brazilian Real has depreciated by some 40% over the period under review, those A$ numbers mask the underlying growth in constant currency terms:
SDI's Revenue from Brazil (in millions of Brazilian Real):
FY2007: 7.1
FY2008: 7.4 (4% increase on pcp)
FY2009: 9.3 (+23%)
FY2010: 8.4 (-7%)
FY2011: 10.3 (+22%)
FY2012: 11.6 (+13%)
FY2013: 11.4 (-2%)
FY2014: 12.1 (+6%)
FY2015: 13.3 (+9%)
FY2016: 14.7 (+11%)
FY2017: 16.2 (+10%)
So when SDI management say that they are persisting with Brazil because it is a large, and rapidly-growing market, they aren't wrong: In local currency terms, the CAGR in Revenue being generated in Brazil over the past decade has been 8.6%pa. (This rate of organic growth has not been evident in A$ terms because of the near-40% fall in the Brazilian Real.)
With Sales Revenue ex- Brazil this year expected to exceed $7.0m, that should be close to the sort of level at which the company has sufficient scale to be able to make a profit.
Depending, of course, how much they choose to retain to continue to grow that business.
But, based on the numbers above, I certainly don't think Brazil is terminal or worthless.
I can, kind of, understand why they keep plugging away at it.
As for the "cost" of SDI's board of directors:
For starters, this year the like-for-like figure will be $1.45m (given the company's founder on 1 July 2017 moved to a Non-Executive Chair role, where he will earn $150k pa, down from $488k in FY2016 for his Executive Chair job)
And then, there's the somewhat unique structure of the board, which means that I think one needs to ensure one isn't comparing apples with oranges when making assessments of this sort of thing.
As I said in an earlier post, when you buy shares in SDI, you are really investing in a privately-run, family business, which happens to have some of its equity traded on an exchange.
And when it comes to the structure of senior management levels, SDI is typical of small, family businesses where all hands are required to be on deck and where there is not much in the way of strict demarcation of responsibility and accountability (with due acknowledgement of the limitations of such arrangements).
This means that the "board" of SDI includes people who are not only directors of the company, but who also wear a few other line management hats, which the directors of "normal" companies, wouldn't do.
For example, the MD, apart from her normal MD KPI's, doubles as a sort of EGM - Sales and Marketing. And her 2-IC, a gentleman by the name of John Slaviero, fulfills the role of COO (i.e., he takes care of all the operational aspects...manufacturing, maintenance, capital works, logistics, procurement, IT, R&D, etc.), CFO (financial management, reporting and control, budgeting, treasury, taxation, etc.), and Company Secretary (compliance, reporting, company admin).
One could argue that it is a strange arrangement, but I suspect that if I had a family business, the structure of the senior echelons of management - where a few key executives are in direct control of as many facets of the company as possible - would look something very similar to the situation at SDI.
So, really, the $1.8m "cost" of the board includes not-insignificant payment for certain line-management services that have nothing to do with directorship functions.
Put another way, they could very easily reduce the cost of the board, by having Slaviero's job spec change to just GM-Operations, hiring a CFO/Company Secretary, as well as a GM - Sales & Marketing. Then the current MD could take a $150kpa pay cut (to a still-generous $400k pa) to be just an MD/CEO, and Slaviero could be replaced on the board by a Non-Executive Director, at a cost of $50kpa (as opposed to Slaviero's total remuneration of $500k pa).
So, in that case, the cost of the board would be reduced by $600k pa, to $850k. That $850k would buy a 7-person board, comprising 5 independent directors and 6 NED's and one Executive Director (the MD/CEO), which is not expensive by any objective measure.
But, while that might achieve the desired
cosmetic result of a cheaper board, unfortunately the total cost to the company would end up being higher, because the company would need to pay two additional GM's (Operations and Sales/Marketing) and a CFO/Company Secretary which, collectively, would cost close to $1.0m.
So, while you might save $600k in terms of remuneration to directors, overall the company would still be the better part of $400k worse off, I reckon.
I therefore differ with you somewhat, when it comes to the cost to the company of the executive function at SDI; I think it is cheaper than it might ordinarily be. It's just that a big slug of the costs is evident at the board level, while non-board management levels are relatively under-expensed, as a result.
Therefore, while I am normally a stickler against egregious executive compensation, I don't think it is much of an issue in this case. (Not that anyone at SDI is under-paid! I think that the situation is merely reasonable, is all.)
Rather, my concern is that the senior people might, in fact, be too thinly stretched to do do their relatively wide assortment of jobs as effectively as I would like, as a shareholder (especially Mr Slaviero). But that's a subject of discussion for another time.
In terms of whether the Cheethams are still enthusiastic and motivated, on this score I have little doubt about them having "fire in their bellies":
The Chairman is still very engaged in the business, as can be expected of someone owning 55m of the company's 119m shares. And don't forget: this is his baby. He started it from scratch. He eats, breathes and sleeps this company. My sense is that the family views the company being something of an unfinished work. After all, at some stage the family patriarch will probably want to monetise some of his holdings. And he is sure to want to do so at a higher - rather than a lower - share price.
The MD/CEO is still young and has just been given a shot at the reigns of a publicly-listed company. I'll wager she is more motivated today than she has ever been in her entire career.
And then there is another Cheetham (whom I've met but whose name escapes me), who is involved in R&D. The time that I met him - about 12 months' ago - he struck me as being unambiguously immersed in the company and its development pipeline, so much so that the development of new products was all he could seemed to be able to talk about. I certainly did not gain any impression of any "clutching out". The opposite, actually; a kind of a mild obsession, if anything.
So, to summarise, there are certain aspects of risk to SDI that I do worry about, but the motivation of management and the appropriateness of the remuneration of the company's senior executives are not among them.
