Ann: Preliminary Final Report, page-13

@alnby,

Well said.

Your post is quite prescient because it deals with something we see all the time in investment markets, that is: "expectations".

Companies are very complex things and they operate in very complex environments, with many thousands of factors affecting what they do, how they do it, and how much money they make from doing it.

And yet, the "market" - in its infinite wisdom - defers to something called a "financial analyst", which is someone who takes all those many thousands of factors at play, and he/she, with the help of a spreadsheet, distils them all into one number:

Net Profit After Tax

And then that one, single figure (which, mind you, is really just a mere accounting construct) becomes the absolute and irrevocable benchmark against which the company is measured for "investment" purposes.

Meaning that, on reporting day the pressing question becomes:

"Did the company meet, or miss, consensus forecasts for NPAT?"

So, a single number - and a rather abstract one at that, given it is based on all sorts of interpretation of some pretty arbitrary accounting laws - and which, itself, is predicated on a distillation of a near infinite combination of combinations and permutations of factors... that single number becomes the basis on which the vast majority of investors gauge the merit of an investment in a company.

Truly bizarre!


Relating this back to SDI:

As you rightly say, this company a minnow.

It is a tiny, family-run business trading its wares in far flung corners of the globe, across a number of geographies and in a variety of currencies. It has a very long supply chain (for each dollar of sale that is made, SDI needs to support it with between 30c and 35c in working capital). It has a diverse customer base of varying sizes and complexions. It has some formidable competitors. Its chosen field of business is rapidly changing. The specifications on products are tight and compliance requirements are high.

In some ways, that this little company has even survived so long, let alone flourished, is quite remarkable, I think.

I think that people - not just with SDI, but with all listed companies - become very bogged down in the minutiae each time those companies report their financial results.

And the fact is that, in any given 6-month period, some thing(s) are sure to transpire which will impact financial outcomes (either favourably, or unfavourably).

And my experience is that whenever SDI reports its financial results, there is just about always some aspect of each result that is not up to scratch, or is a disappointment, or could be construed as cause for concern.

That's just the nature of the corporate beast, I'm certain.

But all the "noise" that emanates from "reporting" season risks detracting from the big picture - and it is the big picture which is the one that shows shareholder value creation (or otherwise).

And in SDI's case the "noise" over time has included a vast array of issues that were perceived to beset the company: Brazil problems, the silver price, accounting treatment, structurally declining amalgam sales, the A$ strength, the remuneration of the chairman, despotism with the appointment of the daughter as CEO, increasing power prices in Victoria, Turkey, restructuring of a major US customer, international competition, etc. etc. (I can go on, but you get the message).

And yet, when you step back from the "noise", this is what you see:

Long-term CAGR in Revenue of 7%pa... across periods of marked exchange rate variability, dramatic changes in the industry landscape, structural decline in Amalgam market, termination of the Chronic Dental Disease Scheme, wars, recessions, a GFC, political turmoil, Brexit, Gillard/Rudd, Abbott/Turnbull, Trump - you name it.

And yet this little company's top line marches inexorably onwards.



(My FY19 forecasts, for what they are worth, reflected by the blue bars.)


Sure, the margins have not always been completely stable, because there have been periods when raw materials (esp silver, increased several-fold over relatively short time-frames during 2009-2010), and the value of the Australian dollar almost doubled (between 2003 and 2011).

But despite these once-a-generation events, the company always generated positive EBITDA (and always generated After-Tax Profits):




But in the 6 years that I've owned shares in the business, despite all the noise that follows each result announcement, this is what I have I have enjoyed:




And when it is considered that, despite the dramatic increase in returns to shareholders has been accompanied by a very significant change in the complexion of the balance sheet (refer below), then that seems to indicate something is going right, I think.

Especially when you consider that, sales of what was at the start of this review period SDI's largest product category, namely Amalgam, have fallen by a significant 25% over that period.




In summary:

Despite what constituted half the company's Revenue in 2012, falling by 25% since then, dividends have risen from zero, to 2.5cps (equivalent to $3.0m); and all this while the company has paid off $10m in borrowings and has built a $6m cash balance.

It is that sort of big picture that the minutiae, of each financial result, fail to provide.

.