Continuing the topical conversation about the strength in the A$...

Continuing the topical conversation about the strength in the A$ and its impact on SDI (which is a significant issue for the company's near-term earnings, but in the long-terms doesn't matter a jot), it might be worthwhile to appreciate just how poor little SDI gets bashed about because of exchange rate fluctuations.

The following list compares period-on-period Changes in the A$:US$ Exchange Rate with resulting Changes in Gross Profit. (For easier observation, the data are ranked from highest A$ change to lowest, with the relevant year year shown in brackets)

Change in A$:US$ vs Change in Gross Profit [Year]

+18%  vs 0% [FY2010]
+14%  vs -8% [FY2008]
+12%  vs -6% [FY2011]
+5%   vs +6%  [FY2007]
+4%  vs -1%  [FY2012]
+3%  vs -3%  [FY2005]
0%  vs +5%  [FY2013]
-1%  vs +8%  [FY2006]
-10%  vs +21% [FY2014]
-11%  vs +4% [FY2015]
-11%  vs +17% [FY2016]
-17%  vs +17% [FY2009]

The inverse relationship between the movement in the A$:US$ rate and the resulting change in SDI's Gross Profit is readily observable.

However, the notable thing is that Gross Profit increases significantly more when the A$ is weakening, than it falls when the A$ is strengthening.  This is perfectly intuitive for a company that is strongly growing its Revenues in constant currency terms.

For added context, for FY2017 year-to-date, the A$ is running some 4% stronger vs the US$.  Based on precedent, that would imply anything between -3% or +6% variance in Gross Profit (with due acknowledgment that historical data is not exactly comprehensive; but rather, confined to a limited number of years.)  

For the sake of prudence, I model an outcome outside the lower end of that historical range, namely -6%, the reason being that around one-third of SDI's sales go to Europe. And the UK, specifically accounts for a large part of that, and with the ~20%-reduction in the value of the pound since Brexit right at the end of FY2016, this will provide an even further hit to SDI's Gross Profit this year.

For what its worth, marking-to-market for the year-to-date exchange rates, and assuming that the current spot rates remain unchanged until the end of the financial year, my model tells me that FY2016 EBITDA will come in at around $12.5m (which is some 20% lower than FY2016's record level).  

Viewed in terms of half-years, 1HFY17 EBITDA will be down roughly 10% on pcp (this is implicit from management's November 2016 guidance), but 2HFY17 will be closer to 25% lower, based on the modelling.

The market should be well aware of the former, but I'm not sure the penny has dropped on the latter yet.
Or maybe it has, I dunno.


(Disclaimer: As a long-term shareholder in SDI I admit to having a vested interest in seeing SDI's share price fall.  So, while this post might bear some hallmarks of a "downramp" to that end, it is merely intended as a sharing of some analysis that was conducted, all the while fully acknowledging the limitations inherent in financial modelling and the formulating of financial forecasts. So bear in mind that if you sell, there is a good chance that I - and people like me - will be buying such disposed shares. Just saying. In the interests of absolute transparency.)