madamswer – In principle I agree with pretty much all of your analysis and reasoning. However I don’t come away from analysing the numbers and the current situation with such a rosie outlook as you do.
There are 4 things from recent reports that I would like to understand better in order to come up with a more confident view on SDI.
The jump in D&A from the latest report.
Short of the company providing more detailed information on the $0.6m once off restructuring costs and IP writedowns I’m happy with the way you’ve ‘accounted’ for them.
2)The ongoing losses from the Brazilian operations. Jimmy_C were you reading my notes?
When I dissected the FY2015 results they gave a A$0.607M loss for the first half and a full yr loss of A$0.27M. The figures lead me to believe that they actually made a A$0.337M profit in Brazil for the second half of FY15. While the Brazilian Real fell sharply.
The latest figures give a first half loss in Brazil of A$0.924M. With the ‘Real’ in free fall during the last 6 mths. I happily admit that this is not my strength but has someone got an explanation for me?
Were they just selling down existing inventory in the 2nd half of FY2015?
The latest report does point out that in the last half a lot of the increase in inventory has been a build-up of semi-finished products to commence the Brazilian packing operations.
I understand the strategy of using Brazil as a beach head for launching into Sth America but what is the strategy now that this operation continues to haemorrhage funds at an alarming rate? The beach head has been there long enough that the original guys to get ashore have been forgotten by their families and still we lose money there.
Sure, SDI now has a license to MANUFACTURE in Brazil. But initially the intention is to only use the facility for packaging bulk product made in Australia.
Are they planning to follow this with manufacturing?
Are they waiting for the economy to improve to make it worthwhile?
Do they expect to continue to lose money?
How much difference will packaging bulk product in Brazil make in dollars terms?
So many questions and so little detail from the company about an arm that is losing a huge amount of money each half in percentage terms when put beside the company profit.
Remember they are operating in a country where the president is fighting off impeachment proceedings, the currency is in free fall having lost 20% of its value against a weakening $A in the last 6 months alone, Moody’s is the third rating agency to recently down grade the recession hit countries sovereign debt status to junk (and they believe Brazil’s progress in fiscal consolidation will be slow and growth anaemic for the next 2 or 3 years).
What’s our long term plan here guys? One of my biggest frustrations with SDI is the lack of understanding on subjects such as this that you can glean from the reports. I have in the past tried writing directly to them on matters such as this without any joy.
3) Amalgam products.
"Australian direct exports (when adjusted for currency movements) sales decreased 11.4%. Amalgam products represent a large proportion of sales in these markets”.
North American sales (in local currency) decreased by 10.2%. The majority of the decrease was caused by dealers and group practices reducing stock levels of amalgam products.
From the minimal data and information contained within the company reports it isn’t possible to know how quickly sales of amalgam products are falling. The ‘vibe’ I get from the reports is that the pace is quickening. “….a growing trend away from amalgam products”. Remembering that they still make up 36.2% of group sales.
madamswer you make a valid point that the new products are fast filling this hole and you talk of the similarities with the BRG situation. However I don’t think we are comparing apples to apples here. “BRG has a mature, and declining, legacy business unit (akin to SDI’s amalgam business)”.
The mature business you refer to I assume is the Australian and NZ arms of BRG and the ‘new age’, the now blossoming overseas markets. The difference here is stark. Sure the Aust and NZ arms of BRG aren’t storming forward however they are not going backward at a growing rate. Even with the help of a historically low silver price this arm of the business is in steep decline. Let’s not forget 36.2% of group sales.
4)Ongoing expenses
As the company runs in the other direction away from amalgam products I believe that an increasing spend on R&D and the acquisition of IP-related intangibles will be the norm. I don’t expect any drop off in this area. Not that there’s anything wrong with that. In fact it is very much a positive. I just don’t see that expense falling any time soon to help the bottom line. In fact I’m inclined to think it will continue to increase.
How much is to be spent in Brazil. Will they turn from packaging to manufacturing? How much will they throw at that? How much have they spent already on the packaging plant?
“Expenditure on plant and equipment and intangibles including R&D, patents and trademarks”. “Strategic ongoing commitment to investing in automation, new product development and intellectual property”.
This is in no way mean for this to be a down ramp. I own shares in SDI and have for a number of years. In fact a couple of months ago I added a few more. (as you can read in a previous post).
SDI Price at posting:
54.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
