As I tried to warn in my post of a few days ago (see below), I expected the result - however it came out - to result in a downgrade for the full-year, because, knowing how the market thinks and operates, there were a number of extraneous variables that hadn't quite been marked-to-market for the full-year.
As it turns out, the result came in a bit weaker than I had expected, but the main issue was the accelerating decline in amalgam sales and, of course, the strengthening A$.
In terms of the things that management have control over, namely the costs, working capital and the management of the firms's capital, things actually looked fine to me. Cash flow was OK in the seasonally weak half and Net Debt more than halved from pcp (but we are talking about small numbers in this regard, as the company is essentially now debt-free).
But I think the result is now consigned to the history bin and in a few weeks we will all be talking about what happens in the future.
To that end, what surprised me somewhat is management's guidance for a 2% increase in full-year Revenue, after the first-half was some 1% lower.
Mathematically, it implies 4.6% Revenue growth for the current half.
I struggle to reconcile how that could be possible given:
1. The A$ has continued to strengthen in the current half (up by a further 6% since the start of the year)
2. They are cycling a full half of pre-Brexit, when the pound was 20% stronger
3. The Amalgam revenue decline is sure to continue (Amalgam is certainly an issue today, but in 12 months time it will be becoming increasingly less relevant and it will cease to be on the agenda. Just a few years ago it was more than half of Revenue.)
So, instead of ~5% growth for the current half, I have chosen to run with flat Revenue for the company for current half, and therefore a slight fall for the full-year compared to F2016.
For what its worth, my world-class SDI model (that never lies) spits out the following for FY2017 (FY2016 figures in brackets for comparison purposes):
For added context, these forecasts imply a further 20%, 23% and 19% falls in second-half EBITDA, EBIT and NPAT, respectively.
And that, I think is a good segue into the thing that ultimately matters, namely the fundamental value of the business.
My forecasts (bearing in mind I have no monopoly whatsoever on getting everything right), that places the stock on the following rough valuation multiples for FY2017:
Of course, because the market should be forward-looking, for my own purposes I will take my valuation cues from FY2018's numbers, in which I expect SDI will return to organic growth (apart from 2006 to 2008, when the A$ rand from 0.70 to 1.00 which was a pretty extreme event, it is fair to say, the company's profits have never declined in two successive years... another way of saying that the A$ rarely goes undergoes a very sharp upwards move for an extended time period).
And on FY2018 figures - assuming, notionally, 10% NPAT growth (which would be modest compared to other "recovery" years) the valuation metrics then become:
I firmly believe that the intrinsic value of the business should be derived by capitalising SDI's prospective financials on substantially higher multiples than those.
Accordingly, whatever happens tomorrow, I will certainly be adding to my holdings.
As always any constructive criticism or debate or discussion is welcomed, hopefully for the mutual benefit of all.
Befitting of a healthy stock discussion forum such as HotCopper.
SDI Price at posting:
63.0¢ Sentiment: Buy Disclosure: Held
(20min delay)
