Sdi Share Discussion Threads

[isa1m] 14/8/2023 08:39

I caught up with the IMC presentation over the weekend.
Isn't the overwhelming conclusion that the CEO is way out of his depth?
(I don't agree with the comments here that the M&A wheel can be spun much faster, nor that financing is a barrier). The real problem with SDI as a buy-and-build/serial acquirer is that it isn't able to support and help develop its acquired businesses.

[pugugly] 11/8/2023 15:02

IMC Presentation useful.

[worldwidet] 11/8/2023 10:32

Yes, it is understandable that as soon as there is money in the coffers, another takeover could be announced. But this only confirms what I am writing. If SDI had the money they would make more acquisitions but the problem is not the M&A pipeline (because management keeps repeating that it is strong) but the problem of SDI is the lack of financial strength. It lacks FCF!

Other serial acquirers Halma JDG to which the bulls like to compare SDI have full M&A coffers and can also afford dividends which increase regularly. SDI, on the other hand, has a chronic liquidity problem and now that interest rates have risen to 5-7%, it is no longer possible to increase debt.

SDI would need 3-4 acquisitions in the range of GBP 5-10 million to turn the M&A wheel that fast to offset the collapsing organic growth. But where should SDI get the FCF from if the existing business is even massively weakening.

The interest burden puts additional pressure on the FCF.

If there really is a deeper recession, which is to be expected, SDI will have a hell of a problem because they have debts and hardly any financial leeway to turn the M&A wheel.

My opinion but it can still get damn ugly here.

And when currently the perma-bulls write how they are buying the dip it is just brave considering the fact that the CEO and executives at 110p still wouldn't dream of buying SDI shares!

[hastings] 11/8/2023 10:17

I would appreciate it, that if you are going to post an extract from my piece, please do so in its entirety, not merely using the lines to suit your argument!

For clarity, "But, this it appears hasn’t been down to any financial or strategic constraints or issues, more a case of various protracted red tape, which should see at least one deal concluded in the near term, with a second likely to follow soon after."

For what it is worth, deals take time to conclude for many reasons as I am sure many will appreciate.
My own view is that when management speak confidently of one being concluded in the near term, then I feel it isn't far away and not just one, but two.

You raise some interesting and valid points, but being so selective to suit your argument doesn't in my view do you any favours.

[worldwidet] 11/8/2023 06:21

The fact is: ~ one year without M&A. That should answer the question or? Unless you believe in the management story:

"Perhaps one of the frustrating things for both shareholders and management alike, is the lack of further acquisitions being delivered at the current juncture. But, this it appears hasn’t been down to any financial or strategic constraints or issues, more a case of various protracted red tape, "

It's funny that only SDI has these problems with M&A.
Once Covid is to blame because the CEO could not travel due to restrictions. Now it's alleged "cases of various protracted red tape".

Strange that other serial acquirers with solid M&A structures do not have these problems and turn the M&A wheel vigorously.

The CEO should simply name the problem openly. SDI has not had the financial means to pursue an appropriate takeover in recent months. With almost GBP 10 million in debt and a meagre cash balance of GBP 2.5 million in the kitty, they are thinking twice about taking on further debt at 5-7% when the interest burden has already tripled and is burdening the balance sheet with GBP 1 million.

If everything goes perfectly for SDI, they can generate a maximum of GBP 8 million FCF per year with the existing business. That would be enough for a takeover at most. Is this how the M&A wheel should be turned?

SDI faces huge problems if there really is a deeper recession and the broad stock markets go down 30-40%.

80-90p could then be a healthy adjusted level with sufficient margin of safety.

We will see...

[shanklin] 10/8/2023 20:07

Thank you hastings

I would be interested in how they are coping with the increase in interest rates and whether there is enough cash flow from the existing businesses to largely fund acquisitions

[alter ego] 10/8/2023 13:22

yes, many thanks for posting

[glaws2] 10/8/2023 13:01

Thanks Hastings

[hastings] 10/8/2023 11:46

Write up below for interest. More brief than usual and I'll add a more in-depth piece after attending the AGM.Hopefully something of interest though.https://martinflitton1.wixsite.com/privatepunter/post/sticking-with-sdi-group-10-08-23

[calougra2000] 10/8/2023 10:31

@hastings - thanks in advance, will be interested to read your commentary.

[hastings] 10/8/2023 10:11

Had a good catch up with Chair, CEO and CFO, so will post my piece for some interest soon. Not a big write up, but touched on some interesting areas!Suffice to say as a long term holder and believer I've added a few at the current level.

[worldwidet] 09/8/2023 12:58

I don't expect SDI to be able to increase FCF by 15% annually over the next 10 years in the long term. Will not create under the new interest rates framework with the existing structures and management.

[nchanning] 09/8/2023 12:50

The cost of capital has gone up for every acquirer so I don't think they should be paying 7.2 x EBIT for a £10 million acquisition anymore . As stated many times there's no need for 35% FCF growth to make a handsome return on SDI . Compounding at 20% is outstanding , 15% more than acceptable

[worldwidet] 09/8/2023 12:43

Do it even better and ignore the developments of the past that were possible in a 180 degree different environment (strong economic growth, low inflation, interest rates close to 0 and liquidity surges from central banks and fiscal stimulus from government spending.

Think about what massively rising interest rates, high inflation and cooling economy/demand mean for the future development of SDI. The good past has been priced in. The share price has risen from just over 40p a good 4 years ago to currently ~110p. The good developments of recent years have been rewarded by the market with strong returns for shareholders. For shareholders who are now considering buying, it is a matter of considering how SDI will develop under the future framework conditions. Can SDI continue to maintain these high growth rates of 30% p.a.? is that likely?

Let's assume (which I don't believe in a recessionary environment) SDI manages to generate £8m FCF. with current cash ~GBP 2.5m they could make a ~GBP 10m takeover. Assuming a 7,2x EBIT multiple then for a full FY this new business would contribute ~GBP 0.9m FCF. We are then talking about 10% FCF growth. The following FY, SDI would then have to make an 11-12m acquisition to get the same 10% FCF growth. However, the existing financing costs alone have risen to almost GBP 1 million. If SDI now falls back on more debt to make more acquisitions, the financing costs will continue to rise massively at 5-7% interest and burden the FCF.

SDI is facing extreme challenges and I think it is almost impossible that SDI can continue to develop as it has in recent years.

In general, stock markets are still overvalued. The bond markets have long since arrived in the new interest rate landscape, the stock markets are still dreaming of AI and cheap money from the central banks, which will no longer exist in the next few years.

The risk premium for equities is historically low. Investors are still willing to pay historically high valuations for historically low risk premiums for equities compared to a safe 4-5% for safe bonds. I think that will change in the coming months/years.

My opinion! I've really said enough here.

[nchanning] 09/8/2023 12:10

The PCR revenue was a one off - but it did allow for an aggressive increase in the number and size of acquisitions . Current year revenue forecasts , with no PCR revenue are for £70m and 7.5p of earnings . Compare that to the last year before COVID of just £24.5 million and 2.7p of earnings . Zoom out , ignore the exceptionals , and the business has made tremendous progress

[nchanning] 09/8/2023 11:37

Fair points but if you're trying to sell your £5 million scientific instrument company in the UK in this environment you're also going to have to accept a lower price , perhaps 3-5 x EBIT rather than 5-7 x

[steeplejack] 09/8/2023 11:15

I don't think Worldwide is saying anything that contentious.His comments could apply to numerous companies,especially serial acquirers,who have profited in a low interest rate environment.Going forward,the economic climate is going to be a good less benign and more difficult to navigate.The Bank of England seems keen to adopt a hard line approach which will more than likely push the UK into recession.With China slowing,stagflation in Europe is more than possible.PS.Volex is a very 'tricky' stock to get a handle on!

[trident5] 09/8/2023 11:13

Oh well, there you go - a strengthening of the acquisition team - you should be pleased that they're taking your advice.

[arieljcohen] 09/8/2023 11:05

WorldwideT - weve missed you and your wrong predictions on the Volex thread.

Remember when you predicted the CEO taking the company private below 200p/sh and describing 260p as a Christmas gift to sell shares? lol

[worldwidet] 09/8/2023 10:14

The new Monmouth manager didn't last 18 months and is now in the process of being replaced.








Who made this personnel decision? SDI CEO ? That's the problem when a CEO tries to take care of everything himself! Mistakes happen more and more. The necessary management structures and M&A structures were not implemented. Exactly what I have been talking about for 2 years!


107p and SDI management are still not hungry for SDI shares?

Ok... the coming recession can still bring a lot of dirt to the surface...

[worldwidet] 09/8/2023 09:53

Don't forget that talks are currently underway between SDI management and institutional investors. SDI has a funny tradition of talking extensively to institutional investors in the days leading up to the company's presentation to retail investors. Why is that? But today these investors are selling shares... Is that good and reassuring?

Mistakes like the Monmouth takeover happen when a single person, in this case the CEO, tries to do everything on his own. Mike wants to fight alone on all fronts and seems to have a big problem sharing responsibility.

The talk on page 22 of the current presentation about a strong M&A pipeline is also not very credible. If SDI had this strong M&A pipeline, they would not have gone 11 months without an acquisition.

The problem is the lack of liquidity. SDI has accumulated debt with probably too expensive acquisitions in the last 2 years.

The interest burden has more than tripled and there is hardly any cash in the account.

SDI would need acquisitions in the range of £12-16m to keep the M&A wheel turning. Where is this money going to come from to finance these acquisitions? More loans/debt? So that interest charges continue to double at the extremely high interest rates?

The M&A track record has also taken a severe Monmouth crack. Who knows what M&A mistakes the coming recession will bring to the table.

It is never good when all the responsibility and risk is concentrated in one person/CEO.


Hopefully after Mike Creedon we will see a CEO who is willing to invest his own money in SDI shares.

[worldwidet] 09/8/2023 09:41

Bulls... I told you... The big institutional guys will be forced to adjust their risk buckets. 100p acts like a magnet.

[cockerhoop] 08/8/2023 13:13

Doesn't seem 5 minutes since you (Worldwide T) were arguing with me that SDI was a far superior business to JDG's - too funny!

[nchanning] 08/8/2023 12:27

If you want to pay 5-7 times EBIT for decent quality businesses, they have to be small not transformational . Judges and Halma have their advantages in cost of capital and professional organisation , but SDI has the ability to keep growing for a long time with one or two sub 10 million pound acquisitions a year where the competition for deals is much less fierce . Copying Judges and hiring an ex-Halma operations guy to help streamline the businesses would be a logical next step and wouldn't break the bank