Ann: Investor Presentation-SDI.AX, page-18

@TitusPullo ,

Thanks for posting that.

It is s comprehensive write-up and it reads very well (if not a little too gushingly for my liking).

I note that a lot of the major investment drivers detailed in the report have, in fact, already been discussed by several contributors on these threads over the past few years, testimony to what a great collegiate resource HotCopper can be when given the chance.

For example, it was always known to most followers of the company that there would be an acceleration in top line growth due to the changed sales mix as sales from fast-growing non-Amalgam products eclipse static sales derived from Amalgam products

But one thing that the Capital H article articulates very well is the thing that only just occurred to me after trawling through the most very recent result, and that is that this changing sales mix was not only influencing the pace of Revenue growth, but also had the effect of boost the Gross Profit Margin.

This favourable Revenue Growth-Plus-Gross Margin phenomenon was discussed in a few posts following the full-year result, but Capital H has provided some hard GP Margin numbers for Non-Amalgam (70%) and Amalgam (50%) products, with which we can now use to model some blue sky future financial performance:

Revenue = $100m (management medium-term target; currently = $75m)
(Assuming 80% being Non-Amalgam; 20% Amalgam)

Gross Profit Margin = 66% (Using Capital H's 70%/50% GP Margin figures applied to the above 80%/20% weightings, and noting that the GP Margin in FY2016 was 62%)

=> Gross Profit = $66m

Cost of Doing Business [*] = $38m (noting that in FY2016 this figure was $35m, so providing for added investment in Marketing and R&D expenditure)
([*] CODB is expenditure on Selling and Marketing, R&D and Sundry "Other" expenses)

=> EBITDA = $29m

D&A = $5m (was $4m in FY2016)

=> EBIT = $24m
=> Pre-Tax Profit = $24m (No Borrowings, i.e. zero interest expense)

=> Net Profit After Tax = $17m

Compared to the current level of financial performance, this would result in increases as follows:

Revenue: +35%
EBITDA: + 88%
EBIT: + 110%
NPAT: +120%

Based on the historical rate of Revenue growth (i.e. making no provision for acceleration in the rate of growth despite the increasing dominance of faster-growing Non-Amalgam sales, nor giving any credit for them finally cracking into the South American market), this means they will hit the $100m Revenue target in 4 years' time.


Now, even if we assume that there is no re-rating of the stock from the current P/E multiple of 11x, on the basis of the numbers from this exercise, generating NPAT of $17m pa (equivalent to EPS of 14cps) would result in a share price in excess of $1.50 at the end of in Year 4.

On an annualised basis, that translates into capital appreciation of around 17%pa, plus a 3% dividend yield, for a Total Shareholder Return (TSR) of 20%pa.


Of course, it is most unlikely that SDI will still be an 11x P/E multiple business if it manages to more than double its earnings over the next 4 years.

Therefore, assuming a more reasonable prospective P/E multiple of 15x, that results in a share price of some $2.10, in which case the annual TSR would be a little shy of 30%pa.


And then, just for fun, consider if some drunken sailors come to town and bid the stock up to Capital H's "no reason why the stock can't trade at 19x P/E" level [#], the resulting share price would be $2.70 (for an annual 37% TSR).

But that's just silly talk, I think.

Me, I'll be happy with just the more realistic, 30%pa TSR scenario.


[#] Don't laugh: for the duration of the FY2004 the stock traded at an average prospective P/E multiple in excess of 25x (!).