Revisiting Judges Scientific And SDI: Acquisitions, Special Dividends, Strong Trading And Share Price Gains

24th Jan '20 by Jack Brumby

11 comments 3867 reads

Given the prevailing macro conditions of quantitative easing and low to negative interest rates, it’s reasonable to assume the past decade has seen more than its fair share of poor capital allocation. When the cost of borrowing is pushed down, projects that would not be economically feasible under “normal” conditions can all of a sudden be given the green light.

Warren Buffett once said: you only find out who is swimming naked when the tide goes out. I think there’s probably more than a couple of skinny dippers out there right now.

For all its bargepole companies and financial scandals, the AIM market is actually a particularly healthy index for small caps. On a market-weighted basis, around three-quarters of its companies are profitable and cash generative and about two-thirds are dividend-paying. Because of this quality, AIM could prove to be quite resilient in the years ahead. It’s a good pond to fish in.

Two of the most promising prospects on AIM are top Quality-Momentum stocks Judges Scientific (LON:JDG) and Sdi (LON:SDI), although some have concerns over their premium valuations. The two companies are similar “buy and build” operators consolidating high margin companies in long term growth markets. They look expensive right now, but they also looked expensive when we wrote about them last October. Since then the Judges share price has increased by 30% (40% at one point earlier in January) and the SDI share price has risen by 55% to 92p.

There has been news flow to power these performances (as well as generally strong market conditions). Both have released news in the intervening weeks and months, so I thought I would revisit them.

(please note: I have small positions in both of these companies)

Judges Scientific: market beats and ‘mini-mes’

Forecast PE ratio: 25.6

Market cap: £343.54m

QM Rank: 99

One of the most attractive aspects of Judges Scientific is its shareholder-friendly culture. An example of this came in late November when the group decided that, “in order to prioritise the interests of its shareholders”, it would pay out a one-off special dividend of 200p per share. This is equivalent to about 3.7% of today’s share price.

Following this payment, the Group will have returned to shareholders four and a half times the IPO price. You can see that it dwarfs previous payments to shareholders:

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cafcash49

24th Jan '20

Thanks Jack, as a holder of both I have found this really useful and thanks for putting the work in to produce it. I don't think I can add anything. Thanks.

jdnthomas

Hi Jack

I think if Judges grew by a factor of 10, it would still only be one hundredth of the size of Berkshire Hathaway (not one tenth)

davidelliott52

thanks for this, great work. Following your last article on JDG I did a lot of research on them and decided that I couldnt pay the current multiple, despite really liking the business model and management. I was wrong then and im probably still wrong in thinking the same today but one day id love an attractive entry point into both of these companies

stockscreen

25th Jan '20

Hi, to date SDI has acquired very small companies with no obvious synergies between them. Only in the last results announcement did they indicate synergies such as shared facilities for a couple of the businesses. And it’s not obvious what the group brings to the acquired companies - the key group directors are all financial people.
The danger with operating lots of small companies is that they become difficult to manage, particularly if things go wrong - the CEO and FD spend their time firefighting. So it as good to see in the last announcement that the group was recruiting, although this doesn’t entirely address the issue of too many small subs.
I’m a holder of SDI which has done me well in SP terms, but I am still to be convinced by the strategy .

barney100

27th Jan '20

Cracking piece Jack

As a holder of SDI I do wonder just how many suitable small imaging companies there are left to acquire? (the same applies to JDG I would assume??)

The recent name change from "Scientific Digital Imaging" to "SDI" lead me to think they may start looking at targets outside there are of competence/experience ... if this is true this brings risks and needs to be carefully managed but it would also signal exciting times ahead.

Jack Brumby

Even better! Will update

One of the central points both Sdi (LON:SDI) and Judges Scientific (LON:JDG) make is that they bring increased financial firepower to these businesses, so growth investment is more readily available and comes at a lower cost. If the underlying businesses have global growth potential then possibly being able to realise that with improved funding is more important than operational synergies?

We shall see... SDI has been going at a fair clip. I'd like to do some more detailed research into the subsidiary companies if possible so that we can take more of a view on the quality of acquisitions. Information can be quite scarce though

Thanks... I agree, at some point (and by the sounds of it soon for Judges Scientific (LON:JDG)) both management teams will have to evolve their strategies and widen their nets.

abtan

Hi Jack

Thanks for another great article.

To echo your point regarding digging into the subsidiary companies, I previously went through each of Judges Scientific (LON:JDG) 's subsidiary accounts for the last couple of years to see if they stacked up to the reported consolidated accounts.

For 2018:
Summation of Subsidiary revenues = £76.1m
Consolidated revenue = £77.9m

This looks the wrong way around and I was not sure why. After inter-company eliminations I would always expect consolidated revenue to be a lower figure (as it was when I performed the same exercise for the 2017 accounts).

I believe all the subsidiaries and group have the same financial year end, though it's been a while since I looked at this, so would need to re-confirm.

I figured that I must have been misunderstanding something and gave the company the benefit of the doubt owing to its excellent cash generation and positive history. It did, however, create some lingering doubts.

For clarity, I did hold Judges Scientific (LON:JDG) until the recent spike when I felt it had become fully valued and was happy to sell out.

Cheers
A

28th Jan '20

Thanks Abtan,

So you got subsidiary revenue data from Companies House, or somewhere else?

At some point I hope to do the same.

Yes, subsidiary revenues all came from companies house

Revisiting Judges Scientific and SDI: acquisitions, special dividends, strong trading and share price gains

Judges Scientific: market beats and ‘mini-mes’

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Jack Brumby

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