"do you currently calculate the p/nta at 1.5? Do you think that is reasonable considering the current contraction in revenue and earnings despite the understandable causes as you articulated clearly"
As to whether that is reasonable or not, well I hope I didn't give the idea that P/NTA is necessarily the basis for ongoing valuation of the company.
I simply quoted it as the basis on which I bought my first shares in the stock, i.e., that it was trading at a discount to NTA even though it was still profitable despite the A$ trading several standard deviations away from its long-term mean, and one of its key inputs, silver, also being priced at unprecedented levels.
So, I guess what I was trying to illustrate through that was that I thought the residual downside risk at that point, was limited.
While P/NTA will provide some sense of extreme downside risk, valuing SDI based on earnings multiples is, I think, the more reliable approach when the stock is not trading at, or near, doomsday-type scenarios. [*]
As such, on my numbers, the stock is currently trading on a P/E multiple of 12.3x and an EV/EBITDA multiple of 5.6x for FY2017 (assuming 2H EBITDA comes in at $7.0m, which would be 27% down on JH2016's record, and 2H NPAT is $3.40m).
That's for FY2017.
But the market is a forward-looking animal, and so it is inevitably going to value SDI more on what Fy2018's financials pan out to be.
If the extraneous factors that usually affect SDI's earnings remain unchanged over the next 12 months, then I expect SDI to report 3% growth in Revenue and around 10% growth in NPAT.
And that will result in valuation multiples of 11.0x P/E and 5.0x EV/EBITDA, none of which look overly demanding to me.
Of course, the A$ could go back to 82c again, which would result in any profit growth in FY2018 - measured in A$ - from being wiped out.
[*] Actually, finance theory dictates that Price-to-Shareholder Equity (P/B) is proportional to Return on Equity (ROE), and that, for a company whose ROE is equal to its Cost of Capital, P/B should be equal to 1.0.
When ROE exceeds the cost of capital then the company is creating economic profit (as opposed to accounting profit), i.e., the value of Shareholder Equity in the business is increasing, and to reflect the future value of that increase in the value of the Equity invested in the business, the Market Value of the business (i.e., P) must be greater than the current equity base of the business (i.e., P/E >1).
Importantly, when ROE>Cost of Capital, based on valuation theory, P/B rises not linearly, but exponentially.
Relating this to SDI, the company's average ROE through "the cycle" is a little over 11%.
The Weighted Average Cost of Capital (WACC) for the company is probably no more than 8% (derived by 9% Cost of Equity and 6% Cost of Debt, with a capital structure of Net Debt: Equity = 80%:20%.)
SDI's current market value today ($68m) is - coincidentally - almost bang in line with the company's book value (i.e., Shareholder Equity, which was $64.6m @31 December 2016, and which I expect will be close to $67m @ 31 June 2017).
So, P/B for SDI is equal to 1.o, yet the company's ROE is higher than the company's cost of capital by a factor of one-third (11% divided by 8%)
On this basis - in keeping with the theoretical relationship between P/B and ROE/WACC - one could conclude that SDI's P/B should be one-third higher than it is today, i.e., SDI's share price is at least 33% under-valued today.
(I say, "at least" because, recall that the relationship between P/B becomes an exponential once P/B exceeds parity with ROE/WACC You would be able to see this if you plotted all the P/Bs of all the companies listed on the stock exchange against all their excess ROE over their cost of capital on the x-axis.)
Of course, while this is all taught in theoretical valuation textbooks, as we well know, in practice the market seldom follows theory in an exact fashion.
Accordingly, evaluating investment opportunities based on using P/B needs to be considered an indicative - rather than a prescriptive - exercise.
At best, what it can be said to do is to reinforce the notion that SDI is undervalued.
At least, that's the way I interpret it, and not much more than that.
SDI Price at posting:
57.5¢ Sentiment: Buy Disclosure: Held
(20min delay)
