Ann: Half Yearly Report and Accounts December 2015, page-4

Ok, had a chance to look at this one a bit further today and crunch some numbers.

First of all, some positives:

Growth in non-amalgam products was strong enough to offset the natural decline in demand for amalgam. Glass up by 25%, composite up by 15% and whitening up by 29% while amalgam declined by 3%. Revenue still grew strongly and the gross margin improved as well as the high-cost amalgam products become a lower proportion of SDI sales.

Sales in Brazil increasing 18%. Admittedly a low base, but it will drive growth for SDI in the near future. Gross margins will be assisted when packing starts in March, and opens up other South American markets.

Strong dividend growth again, great confidence from management in the company's future.

However some concerns:

Decline in the growth for Aus and US. Could be very concerning if it can't be turned around very quickly. Both markets relied heavily on amalgam, so it doesn't come as a surprise, but the shift to non-amalgam products needs to happen soon.

Selling expenses increasing to $16.3m after being steady around $15m in the last few half years. A part of it appears to be "one-off restructuring costs" and also currency movements, but it is worth keeping an eye on.

Receivables + inventories now over $30m. Directly hurting operational cash flow as it declined from $2m to $1.1m from the corresponding half year. Historically SDI has performed much stronger in the second half than the first, so we may see a reduction in the build up of receivables + inventories and flow through as cash flow in the second half. Especially as some of the build up was credited to the start of packing in Brazil.

Overall I think this a great report for the strength of the company. I'm a bit surprised with the sell-off today. On this half yearly it is trading on a P/E of less than 10 and an EV/EBITDA of less than 6. Those numbers are inflated though as historically the second half is much stronger than the first half, usually around 40/60, sometimes even 35/65.

Maybe the market doesn't see any growth in the future, but I think this report should have eased those concerns with the strong growth across all non-amalgam streams. The problem may be that the full year report will be compared to a historically good one for SDI, so even though we may see half on half growth, it may be previous corresponding period decline.

Two things that could result in a bumper 2H though could be three/four months of lower production costs in Brazil which will hopefully combine with continued growth for South American to contribute on an EBITDA level. The other factor is hopefully the excess receivables and inventories being utilized this half and cash levels supporting another very strong dividend payment. The market is ignoring the P/E and EV/EBITDA value, but maybe it can't ignore a higher yield.