Sdi Share Discussion Threads

[steeplejack] 25/1/2023 10:56

I agree with all that Worldwide.I lightened my weighting in SDI a year or so back prompted by the top slicing of the Chairman,Ken Ford.Ken was in the City for many years,being at Wedd Durlacher as an analyst,Morgan Grenfell as head of research,plus various appointments thereafter.I have always followed the dealings of 'insiders' closely.I hold a residual interest in SDI which i'm happy to hold but have no inclination to add just now.

[worldwidet] 25/1/2023 10:46

@steeplejack I appreciate you as an experienced investor who is not blinded by the 12 year bull market but also focuses on the risks.

SDI only came on the list of many new investors after 2020 when SDI was one of the big COVID winners from one-off deals in this area (ATIK).

The "new" SDI investors, some of whom jumped on the bandwagon very late after 2020, are now trying to continue the success story and the growth that SDI made in its early phase into the future.

But the data shows that SDI can no longer just take over small companies with 4-6x multiples, but must increasingly focus on expensive acquisitions of larger companies to achieve a comparable impact on the balance sheet in M&A growth. The last acquisitions were over 7x multiples and SDI will increasingly have to compete with JDG HLMA DPLM and PE funds for good acquisitions. It should be noted that the last 12 years the economy grew strongly when interest rates dropped to 0 and the economy was well supplied with money. In this environment, SDI has also been able to grow its FCF well organically. Now the economy is in the process of cooling down very strongly and this could go on for several years. SDI has built up a mountain of debt with the last acquisitions and the FCF is not growing strongly enough to finance larger acquisitions.

Yes it is nice when because of a few thin lines in a major mainstream paper by an investor who has freshly invested in SDI 300p price targets are proclaimed and the SDI price bounces in the short term by 7-8%. But I think it might be prudent to reduce risk in the face of a recession ahead as the CEO and Chairman have done.

SDI investors are very spoiled. Everyone expects SDI to beat forecasts and continue to grow at 30%. I would imagine that there will be disappointments in the next 1-2 years if the risk of a recession materializes. 100-120p could well be realistic if panic breaks out in the stock markets because something systemic in the financial markets has broken under the interest burden.

Many are waiting for the next M&A RNS but I see it critically. SDI will continue to build up the debt mountain with another acquisition and in a weakening economy and a phase in which FCF from organic growth is lacking, there will be less and less financial power available to keep M&A growth high. If SDI wants to grow further by 30% which is what the investors expect and what the management expects (~8-9% organic 20% M&A) then many and large acquisitions have to be made and financed. I wonder where this FCF should come from if organic growth increasingly disappears.

The interest rate structure and the leading indicator are good signposts of what could still happen. In such a time I see CASH as the best investment to wait at the safe edge and to grab if the big panic starts because the high expectations that are currently priced in by the stock markets do not materialize.

I pull back again and wait and see what happens in the next 16 months.

[steeplejack] 25/1/2023 10:16

Reassuring article but as SDI grows in size,those 'below the radar' acquisitions are going to make less impact on the expanding group's bottom line as a whole.You can make loose analogies with Melrose in the early years.SDI is an acquisition specialist and like Melrose,its not in the business of slash and pillage so much as kindly integration.In a more bullish equity market,a 220p price tag would be quite wearable for the stock but we're not in a bull market and risk is being correctly priced in.I remain a keen LTH but feel the stock is correctly valued at around 160-180p level for now.

[petewy] 25/1/2023 09:41

Thanks Riv. I was about to sell but "it's a long term hold".

[arregius] 25/1/2023 09:36

Emotions... what a writeup can do. Yesterday it was the same company, there is a lot of alpha for investors that make their own DD. Long Sdi

[rivaldo] 25/1/2023 08:52

Cheers Malcolm. Great to see SDI getting some mainstream press attention. The article is essentially an interview with "Eric Burns, of Sanford DeLand Asset Management, whose Free Spirit fund recently bought a stake in SDI".

In case anyone can't read it as it's subscriber-only, a few tasty extracts - 300p is a nice round figure target:

“It has tended to make two acquisitions a year and so far it has not made a mess of any of them. On that basis I estimate its value at around 300p a share.” The current share price is just 153p.

Burns says he has also calculated a value for SDI on the assumption that it does not make any more acquisitions. That estimate is around 220p a share. The discount of the current share price to this figure, never mind to 300p, gives him a margin of safety should anything go awry at SDI.

But it’s not just these numbers that offer reassurance about the company and its acquisitive business model; we can take comfort too from the way it goes about choosing and then running the businesses it buys.

“SDI is considered to be a ‘good acquirer’,R21; Burns says. He takes as an example LTE, a scientific equipment maker it bought last year. “We went with SDI’s boss to see LTE last week because we were keen to examine the process by which it had decided to sell to SDI,” he adds.

“We heard that the two businesses had known each other for some years and that LTE, which was family owned before the sale to SDI, had been looked at by private equity buyers in the past.

“LTE was very keen to deal with SDI because of the reputation it had as a buyer after its acquisition of other businesses. It doesn’t rip the heart out of them – there are no mass redundancies, no accountants turning up to slash costs. The businesses it buys are left to carry on as before, with their existing brand and staff.”

“It buys companies that are already profitable but normally too small to attract much interest from private equity,” says Burns. “This means it can negotiate keen prices, typically just four to six times earnings on the ‘Ebit’ measure.”

In other words, the acquired business pays for itself in just a few years, after which its cash flows can help the company fund later acquisitions. This avoids the need to take on big debts or to “issue new shares like confetti”, Burns says, so earnings are not diluted for existing shareholders.

Its history of successful acquisitions has helped it to grow sales by 36pc a year over the past five years and earnings by 40pc a year.

“It’s a nice, steady growth business,” Burns says. “People don’t appreciate its value because brokers can’t account for future acquisitions. It’s a long-term buy and hold stock.”

Questor says: buy"

[hastings] 25/1/2023 07:28

Very pleased for you Malcolm and thanks for posting the Telegraph link.

[malcolm caton] 25/1/2023 07:02

With thanks to Hastings,I bought these at 23,1p following a tip many years ago from him as private punter in the Cambridge Evening News,

[malcolm caton] 25/1/2023 06:55

Write up in Telegraph by Questor,
Can't get link to work.

[hastings] 19/1/2023 14:19

Have to echo your thoughts rivaldo, spot on again.Worth also pointing out a little known fact, that back in 2013 following a failed reverse takeover of SDI Ken Ford dug into his own pocket to support the business. The deal fell apart at the last hurdle and the company was on the ropes. Thankfully both Ken and Mike picked the business up which was seeing flat YOY revenues and transformed it.

[rivaldo] 19/1/2023 12:43

Hmmm. I don't remember "special factors" like Covid being around when I and others here first invested in around 2015/16 - the current management have shown their ability ever since then, not just in the last three years.

If China invade Taiwan then we're all stuffed! It's not going to happen imho for some time to come, if it ever happens. But that's just a subjective opinion of course.

Global pharma/healthcare and related sectors will only continue to grow over time, recession or no - and a recession would enable SDI to pick up more businesses at cheaper prices.

SDI are now on a P/E of 16.9 for the year ending in only three months' time. We know from repeated examples that forecasts for SDI are usually undercooked, and SDI have a nice habit of underpromising and overdelivering.

SDI's rating is hardly challenging in itself, let alone in comparison with JDG's, which is much higher.

Even if SDI "merely" perform in line with expectations then they will be on a very reasonable rating for a growing company in a fast growth sector.

It's worth noting - with the final Atik one-off - that H1 delivered £6.5m adjusted PBT - almost 55% of the year's forecast £11.9m.

And H1 delivered 5.02p adjusted EPS - again 55% of the year's forecast.

So even a mediocre H2 would likely enable SDI to meet expectations. Plus the substantial earnings-enhancing acquisitions of both Fraser and LTE in August and October will contribute fully to this H2, which should further benefit the results.

[worldwidet] 19/1/2023 11:17

The risk of a longer and deeper recession seems to be becoming more and more real.

If the risk of an escalation in the China-Taiwan conflict is also realized, SDI will need much more than a new Atik order from China.

SDI has accumulated debt and has severe problems in FCF generation.

Organic growth and FCF growth is melting like butter on a hot stone.

Lots of personnel changes at SDI.

There may be several tough years ahead for SDI.

SDI investors were spoiled the last 3 years because SDI could profit strongly in its young phase coming from low valuations due to special factors from Covid.

Now SDI has grown and has to show how much
value they can create for shareholders in a more difficult environment of a possibly deep and long recession.

There is also no relevant share ownership among executives.
The executives hardly own any shares and what they do own they have received via options.
None of the executives has ever bought any significant shares with their own money.
On the contrary, the executives have sold a massive amount of shares in recent months.
SDI can be a very good business but it is also important to consider the risks!

[rivaldo] 19/1/2023 10:30

JDG are up today after their trading statement noting that they're "modestly ahead" of expectations for the year to December'22. Most importantly, order intake "picked up strongly in December with the relaxation of China's Covid-19 restrictions", which hopefully bodes well for SDI too.

With the humungous number of Covid infections in China (and likely to grow with the Chinese New Year travel spreading it further) it occurs to me that perhaps there's even a chance of further Chinese OEM orders for Atik.

Whether realistic or not, that's far less important than the apparent return of normality and growth to scientific instrument/equipment markets.

[worldwidet] 18/1/2023 11:56

big seller that has found a big buyer.

Looks like one of the many arranged manager sales of late.

Has Ken Ford possibly found a big buyer to take his iron out of the fire?

[steeplejack] 06/1/2023 12:45

https://www.fidelity.co.uk/factsheet-data/factsheet/GB00BYYQC271-cfp-sdl-free-spirit-fund-acc/portfolio

[ymaheru] 05/1/2023 14:03

Could be the case.

[valustar1] 05/1/2023 13:40

Guess that’s who Mike sold his shares to

[rivaldo] 05/1/2023 09:40

Happy new year everyone.

The CFP SDL Free Spirit® Fund, run by Keith Ashworth-Lord, has this morning sent out their January 2023 Fact Sheet.

There's a rather nice section as follows:

"For some months we have teased that we have been building a new holding, which we can now reveal as SDI Group (market cap: £154m), a profitable and growing business operating in the niche life science and technology space. SDI is one of a small number of successful buy and build businesses on the public market where a disciplined approach to acquisition criteria – not least a valuation target of 4x-6x EBIT – has been incredibly accretive to shareholder value over time. SDI has built a strong reputation as a good acquirer meaning it is sometimes able to make purchases even if it is not the highest bidder. SDI has made a total of 17 acquisitions since 2014, approximately two per annum, of niche businesses typically making pre-tax profits in the hundreds of thousands per annum, well below the radar of other purchasers – this is the secret sauce."

[fillspectre] 04/1/2023 21:42

Hefty share volume today! Fils

[gleach23] 13/12/2022 18:42

Nice finish today - not your average 100 shares UT in the auction to distort the closing price but a 48,563 trade 3p above the quoted offer going into the close.

Will be interested how it opens in the morning as usually with the 100 UT distorting trades the price resets again the following morning.

[petewy] 09/12/2022 13:03

Thanks Rivaldo

[rivaldo] 09/12/2022 10:41

Just caught up with the Investor Meet presentation. A few points of note aside from comments on the numbers:

- they've known LTE for 6 years prior to acquisition. The late founder's family had no interest in running the business and wanted to sell. Acquired on a low multiple, with high revenues but relatively low profitability. SDI are confident they can increase profitability, particularly via working together with Monmouth and Safelabs as regards sharing equipment servicing etc
- Frasers were brought to SDI by Westcott Corp Finance, who were previously Safelab's advisers. Growth here is likely into the USA and China, also with a German office
- a number of SDI's businesses have trading back-ended/weighted into H2, which should bring "healthy sales". Mike was positive about meeting expectations despite the difficult global economic conditions
- are SDI pursuing deals/acquisitions in the USA? Yes!

[shanklin] 09/12/2022 07:41

Given his background, I guess SDI FD is a pretty small job for him. Let’s hope he can bring his wide experience to bear at SDI.

[rivaldo] 09/12/2022 07:27

Interesting to see our relatively new CFO take up an NED position at Porvair today:



Perhaps there might be some nice business opportunities for SDI here?

"Porvair is a group of specialist filtration, laboratory and environmental technology businesses. Its businesses design and manufacture a range of bespoke consumable filtration products that are used in a range of niche filtration markets. It operates in three divisions: Aerospace & Industrial; Laboratory; and Metal Melt Quality."

[steeplejack] 08/12/2022 19:34

Fair enough summary if not a tad pessimistic perhaps.Of course,there's always a possibility that SDI attracts a bid at some juncture given (as Rivaldo observes) SDI is relatively on a fairly undemanding rating.