Sdi Share Discussion Threads

[worldwidet] 08/12/2022 15:43

full agreement. My opinion is only one of many and time will tell what happens. Repeating it will not make it more right or wrong. :-) I say goodbye and wish everyone a peaceful Christmas and all the time good investment decisions.

[rivaldo] 08/12/2022 15:35

Lots of "will"s and "would be"s there :o))

Not a bad thesis, but the absolute certainty with which it's delivered and the numerous repetitions over the last few days of said thesis tend to devalue it. Come back in a couple of years and see if you're right from this point - if so you will have bragging rights!

[worldwidet] 08/12/2022 15:19

The CEO deliberately chose the timing of the sale. If he had expected prices to continue to rise or if he had assumed that the share was undervalued, he would certainly not have sold it. I am glad that after so much hard work the CEO has taken the money and is not taking the risk of what could happen in the coming years with a severe recession.

I think the money is better off with his happy children for the next 1-3 years than in SDI stocks. Apparently he came to the same conclusion.

SDI has benefited massively from 2 factors in recent years:

1. Economic growth driven by central bank liquidity that is far above the norm in the historical context

2. Covid19 and the associated temporary surge in demand from China (Atik)


SDI's growth was mainly driven by M&A, while organic growth increasingly weakened.

The organic growth was essentially determined by the special situation at ATIK caused by Covid.

The growth strategy at SDI is essentially based on taking over high-quality companies at low multiples (3-6xEBIT) and optimizing them within the group and allowing them to grow. The resulting cash flows are reinvested essentially through M&A.

As long as the economy is running at full speed and the FREE cashflow can continue to increase, the M&A hamster wheel can continue to turn vigorously.

Because the stronger SDI grows as a group, the more the M&A wheel has to turn to keep growth high.

However, if, as with SDI, the cash flows normalize due to the weakening economy and the disappearance of special factors such as Covid, and the free cash flows available to the company for M&A collapse due to high long-term inventories, etc., there is no power to turn the M&A hamster wheel faster and faster.

To do this, SDI has to look for ever larger M&A targets or make more acquisitions to keep the hamster wheel going. To do this, SDI has to go into the shark tank and fight for M&A targets with JDG Halma Diploma and financially strong PE funds. Recent takeovers clearly show the trend towards higher takeover multiples.

In addition, SDI accumulated a small mountain of debt with the last major takeover.

If the assumption of a deep and prolonged recession proves to be true and this also affects SDI's free cash flows, SDI would be constrained at a time when it could certainly make good acquisitions due to a lack of financial power.

At a time when the economy is heating up and the order books are bursting, it is very easy for a young serial acquirer to grow rapidly and satisfy investors with incredible growth figures.

However, if the economy weakens (and with it the cash flows) and the company reaches a size in which small takeovers or special situations in one of the subsidiaries (Atik) no longer lead to extremely positive effects in the group, growth will weaken significantly.

I think the long-term growth targets of 28% p.a. (20% M&A 8% organic) announced by the SDI MAnagemnet are too ambitious.

SDI will experience increasing structural headwinds over the next few years as the group continues to grow and individual acquisitions and positive developments in individual subsidiaries (such as Atik) will have less of an impact on the group.

If SDI can grow at 10% over the long term and can afford a dividend with a 20-30% payout ratio, a ~15x FCF valuation might be fair. I consider the current rating of ~30x fwdFCF to be too high in view of the company-specific, but also geoplotic and economic risks.

The CEO recognized this and decided to take his capital out of the risk.

[rivaldo] 08/12/2022 15:00

Noted steeplejack, but in the two cases I quoted as examples, both companies have almost non-existent or fairly mediocre EPS growth ahead, so their PEGs would show little value. Yet their ratings are much, much higher than SDI's.

JDG's EPS is forecast to rise by just 2.6% in 2023 (admittedly following a good 2022), yet their current rating is far ahead of SDI's. Perhaps they deserve a premium, but not such a large one.

I'm suggesting that SDI's rating has now fallen to a level where it's out of kilter with sector comparators and other companies with good track records.

Mike spent much of his share sale monies on helping his kids with new homes etc. Having met him several times I tend to trust what he says, especially as from memory he's now 61, so for him to cash in - for the first time - at a point when there was evidently both institutional demand and a window for selling in between results and acquisitions is understandable.

[worldwidet] 08/12/2022 14:07

When the CEO, who has built up the company with great effort, sells almost all of his stock in times of a looming recession and weakening corporate growth, I think it is very naive of me to presume to understand the company better than the CEO.

Pay attention not to what they say but to what they do.

[steeplejack] 08/12/2022 14:04

I think with an acquisitive vehicle like SDI the rating tends to relate more to the PEG ratio rather than the earnings multiple and growth inevitably is flattening out as the company expands.

[tiswas] 08/12/2022 13:37

Heavy director selling and no director buys in over 3 years has kept me away recently.

[alter ego] 08/12/2022 12:40

I hold both rivaldo so I agree there's a wide discrepancy largely due to SDI's paltry rating.

[rivaldo] 08/12/2022 12:35

Absolutely alter ego - but a P/E of over 30? I'm not debating the merits or otherwise of any individual companies, simply the very large discrepancy in the ratings!

SDI's rating now simply appears too low by comparison given its record and proven ability to make and integrate good acquisitions.

[alter ego] 08/12/2022 12:21

to be fair ABDP is quite a different kettle of fish. It occupies a pretty unique niche with some heavily embedded relationships with car makers. Might justify a premium rating?

[worldwidet] 08/12/2022 12:13

Estimate Changes - Progressive Equity Research:

FY23E FY24E

£m unless stated Old New Change (%) Old New Change (%)
Revenue 66.1 66.1 0% 688 68.8 0%
Adj EBIT 12.7 12.7 0% 13.1 13.1 0%
Reported PBT 10.4 9.0 -13.5% 10.3 12.2 -3.4%
Reported EPS (p) 8.0 6.9 -13.8% 7.7 7.3 -5.2%
Fully adj EPS (p) 9.9 9.5 -3.8% 9.9 9.6 -3.0%

[buffetteer] 08/12/2022 12:00

Agreed . As Charlie Munger says a company tends to be worth the same as its returns over time . Since we’re making 35% ROCE it suggests now is a great time to buy

[rivaldo] 08/12/2022 11:23

SDI are now on a current year P/E of only 16 at 149p based on consensus 9.3p EPS. I gather that this is now around a 35% discount to JDG.

It also looks anomalous relative to many other valuations out there. Completely randomly, yesterday I looked at ABDP, which is on a P/E of 30.5 despite relatively pedestrian forecast EPS growth. FRP are on a P/E of 22 despite its EPS being almost unchanged from 2021 through to 2024 forecasts!

This despite SDI's almost 180% EPS growth in just three years to that 9.3p EPS. I would hope that current forecasts are conservative as usual. And as always they don't include any benefit from further acquisitions.

Finncap note that cash flows should enable SDI to have around £20m available for acquisitions, which they state could bring in around £3m of EBIT based on past multiples.

[steeplejack] 07/12/2022 13:22

Yes,i think the rally is over.Technically hitting ceilings both sides of the pond.

[alter ego] 07/12/2022 12:43

I also hold both. JDG not as long as Cornishman but about a decade. I sold a few the other day to rebalance the outsized holding and completely wiped out the original cost. Dividends have been a bonus.
SDI is more recent, 2019, but showing a healthy profit on the 51p paid originally.
Both stocks amply illustrate the benefit of a long term investment mindset which lets management do what they are good at and ignores market sentiment fluctuations.

[kalai1] 07/12/2022 12:43

SDI Group Plc posted Interims for the 6 months ended 31st October this morning. Results were strong and operational progress was solid. Revenues increased 28.3% to £31.7m, adjusted profit before tax increased by 14.0% to £6.5m and adjusted diluted EPS increased by 28.1% to 5.02p. Two new acquisitions were added to the Group - LTE Scientific Limited and Fraser Anti-Static Techniques Limited – during the period. Management expect to deliver a full year trading performance in line with market expectations. The balance sheet is solid, valuation is average for the Healthcare Equipment & Supplies sector with forward PE ratio at 17.9x.The share price also lacks momentum and has been trading sideways for nearly 2 years. The company has growth and profits, but the share is one to monitor for now...

...from WealthOracle

[jaf111] 07/12/2022 12:33

Very well stated Cornish…..

[cornishman33] 07/12/2022 12:16

SDI is often compared to JDG which is on a higher PE, but hardly ever mentioned is that JDG pay a dividend. Although the yield at the current price is under 1%, those that have held since 2006 when it was first paid will be getting a yield well above 50%.Since paying it's first divi in 2006 it has grown at 20% each year. On top of that in 2019 a £2 special was paid which recovered the entire original investment for long term holders.For the record I hold both.

[starpukka] 07/12/2022 11:55

steeplejack. Traditionally the UK xmas rally starts in about a week. Based on your 40% cash strategy in one of your UK PFs; are you suspecting we have already had our rally and it is downhill from here on in ?

[steeplejack] 07/12/2022 11:40

Well,as ever,Wall Street will lead the way.Its likely that Wall Streets Xmas rally will run out of steam fairly imminently.The Fed has a real conundrum of fine tuning interest rate rises especially with labour shortages fuelling wage inflation leading to an inflationary spiral.That's all known.Some well regarded strategists are now suggesting that the S&P could fall back a third from here as the recession bites into company margins.The real question is how long and enduring the recession is,there are so many imponderables especially geopolitical factors.I feel those recent insider sales by CEO and chairman were primarily triggered by macro concerns.I remain 40% liquid in one of my larger UK orientated portfolios.I'm not unequivocally bearish so much as uncertain as to the outlook like many others.

[worldwidet] 07/12/2022 11:12

The stock market is currently pricing in a soft landing of the economy in the broad corporate sector and is avoiding focusing on a recession, whereas the highly liquid bond markets are already pricing in a severe recession with a massively inverted interest rate structure across all maturities.
This was also the case in the previous bear markets with recession in 2000 and 2008.
When the stock markets start to price in a severe recession because the economic data continue to deteriorate, a revaluation will take place.

In the event of a soft landing, I continue to see prices of 160-180p.

In a recession (which I expect) I think prices around 100-120p are quite realistic.

[caterham88] 07/12/2022 11:10

I attended the SDI presentation at the recent Mello conference. Michael Creedon, the CEO, said there were 12 deals on the go for acquisitions. He also said there were 3 companies of interest in the US, but I'm unsure whether these are included in the potential 12 deals or not.

[steeplejack] 07/12/2022 11:03

Umm....pretty punchy target price.As with many others,the jury will be out as to how SDI copes in the coming months.I'd expect the shares to continue to tread water around 160-180p

[rivaldo] 07/12/2022 10:55

Finncap retain their 275p valuation.

They note that even at 275p the share price would still compare favourably to JDG's current valuation.

[worldwidet] 07/12/2022 09:46

If the massive interest rate hikes and extremely high inflation only have a weak impact on the economy and a soft landing is possible, the current valuation of SDI looks fair. However, if the economy enters a sharp and prolonged recession (which is signaled by the bond markets with strongly inverted interest rate structures), then the valuation is too high because the recession and thus the weakening demand with high inventories will lead to strong cuts of the results. SDI is a great company but a deep recession would also hit SDI hard.

I remain cautious and even with great companies like SDI further on the sidelines.