SDI A Case of Chinese Whispers ?

26th Feb '20 by Steve Hill

10 comments 1209 reads

I’m currently reviewing my holding in SDI after its 25%+ fall since the Coronavirus outbreak.

Having noted in their latest results that approx. 25% of their sales went to Asia I assumed its fall had been due to it being heavily dependent on Chinese supply or sales.

However my review dug up a report on Stockopedia by Damian Cannon, of the CEO’s recent (Feb 2020) presention at a Sharesoc event , where in answer to questions :-

“Mike (Creedon CEO) stated that they have almost no dependency on China either in terms of sales or supply chain. So that's reassuring.

So I guess my question is do readers know of another reason why the price has fallen or is it a simply a case of investors mistakingly assuming SDI have a larger exposure to China than they actually do ?

Unlock with Email

Unlock with Google

Already have an account?
Login here

About the Author

Steve Hill

Premium Member

10 comments

john652

26th Feb '20

Hi id suggest profit taking, if you look at the chart it was up almost 100%, it is also a bulletin board favourites so probably subject to a higher volume of smaller private sales. That’s useful on the china dependency , i have a resting buy at 65p, after the us falls last night lets see what happens today.

ambrosia

26th Feb '20

as far as corona virus is concerned is not so much China we should be worried about now, its the rest of the world

Damian Cannon

26th Feb '20

One of the reasons that I went to the ShareSoc meeting was to ask Mike Creedon this specific question about China. He was pretty categorical that their dependency is low but, of course, this was before the rise in reported cases outside of China.

Personally I think that investors are looking for liquidity and selling where they can at the moment. With Sdi (LON:SDI) being small and lightly traded I think that the share price impact is disproportionate but this effect also works on the upside too (considering that we're just back to where we were 2 months ago).

The 62-64p range looks like a support level. I'm interested in buying more at this level but I'd like to see the support confirmed - since a break to the downside could take us to the 50-55p level.

mojomogoz

26th Feb '20

IMO SDI seems quite a low quality business (I don't know it well so could be misperceiving, say, in the way that I think many non holders mischaracterise UP Global Sourcing Holdings (LON:UPGS) as a low quality business).

They acquire and own a bunch of small engineering businesses. Each business operates independently so they are a conglomerate. For some reasons SDI viewed to be an exciting conglomerate...why?

My guess as to why is 1) pro-cyclical beta effects and 2) perception of underlying quality engineering niches

Taking 2 first, I think this is stretching the elastic. The businesses are established and with niches but not necessarily as group with quality growth characteristics. History says that small engineering niche businesses of even decent quality wither or get competed away. Its not clear to me why SDI will not have a number of businesses like this. When the cycle is good this is hidden as demand is generally good enough. When the cycle weakens some bodies might float up in the group.

Takes us to point 1. What do I mean by pro-cyclical beta effects? That SDI is a stock to buy on the way up and sell on the way down. On way up its premium pricing relative to what it acquires works as an up escalator and share issuance to fund 'growth' and uplift in valuations works nicely. Hey presto a forward p/e over 20x as its a quality-ish growth company....but cycle and/or business downturn and the p/e comes down to cyclical engineering business level perhaps without strong expectations and that can be sub 10x

I also don't really like the CEO. I watched the ShareSoc presentation and he made me uncomfortable. He's quite a domineering personality and I guess that him as your manager could be quite stressful...some will view that as good I know. I also felt the CFO was rather fearful of saying much. On the China question Damian asked I felt he told the truth in a knowingly limited way....but it is inconceivable that there is not a knock on effect (eg they might not source direct from China but they will buy supplies from intermediaries that do)

So, should you buy or sell now?...

shipoffrogs

26th Feb '20

Low quality conglomerate - you could have said the same about Halma and Judges.

mojomogoz

26th Feb '20

I could...but I didn't. Got anything specific in response or do you just cookie cut follow anything a bit buy and build?

Steve Hill

27th Feb '20

Thanks for the feedback.

From my further digging yesterday, I am of the opinion that far from being negativley impacted by Coronavirus they maybe one of the few companies that could benefit from it.

As they have no exposure to China & their primary market of life sciences & healthcare includes products used in vaccine development.

I noticed the price increased by 13% from early play yesterday so maybe other investors are also waking up to this being a hedge against the impact of Coronavirus rather than a victim of it ?

Jeffvshepherd

27th Feb '20

While SDI has minimal exposure to China I'd hazard a guess that many holders are thinking as it has exposure to the region it will be effected.

shipoffrogs

27th Feb '20

I think what gets overlooked is not a company's sales/supply chain exposure to China but the impact of those exposures on a company's customers. That is a lot less visible to investors.
In those terms who really knows what SDI's exposure looks like.

The Hierarchy

27th Apr '20

Taken from the ADVFN board post by Hastings.

Last week saw Cambridge based SDI Group releasing an end of year update to the market, which was, by and large on the day received positively.

Indeed, the share price moved northwards, as the company announced that full year 2020 results would be in line with current market forecasts.

Of course, as in keeping with other companies now updating or reporting, SDI has understandably withdrawn current market guidance for the financial year ahead which is pretty much to be expected given the as yet, unknown time lines and the potential for disruptance from the Coronavirus.

Although as I mention the share price moved forward, some investors clearly exited on Friday, the shares pulling back close to 10% lower at 52p.
Some holders appeared to express a nervousness regarding the potential for a collapse in profits for the forthcoming year, whilst others seemed to be expecting an imminent placing.

In order to seek some possible clarity on the picture, I once more, as has been customary now since 2013, caught up with CEO Mike Creedon and Chairman Ken Ford.

On the issue of a near term placing as some have suggested could be in the offing, Ford dismissed the notion, telling me that they do not currently need to raise cash and referred me to the content of the release.

Within that, SDI referred to its sporting a strong balance sheet that holds cash in excess of £4.5m which standing against bank debt of £8.9m looks comfortable enough.

Obviously, the current lock down situation brings disruption and uncertainty, but given that we know that the economy is surely going to have to open up sooner rather than later, as a holder of SDI shares I remain comfortable with the statement.

As others will know within SDI's broad and diverse interests there is some decent exposure to the health sector along with others supporting that.
Creedon informs me that some aspects of the group have been designated as essential businesses and as part of that are involved in providing their customers with components for medical and scientific products used in the fight against COVID-19.

There is no inkling as to what these may be involved in, confidentiality playing a part, but it is certainly welcome news that SDI is playing a part in a fight against the virus and that the group remains profitable and cash generative.

No doubt some may view the removal of future guidance as a fly in the ointment and have obviously already made their decision on that.

However, the team here navigated by Creedon and Ford has done an excellent job over the last five years and under their leadership, I'm happy to stick with the story which remains an attractive one for ongoing growth.

Both repeat the acquisition mantra, which not surprisingly remains an important ingredient to future growth here and Creedon says that although there is nothing on the agenda right now, they continue to look.
He adds that he is hopeful that there will be a number of acquisitions available at the end of this pandemic.

As bad and unwanted as the current lock down situation is, in relation to the former, SDI could find biding its time provides for some decent opportunities further ahead following on from previous excellent acquisitions.

Any future buy is likely to be at the smaller end which Creedon confirms will be funded from its own resources as opposed to going back to the market.

Looking at the share price graph, SDI has traded in a 52 week range from a 20p low up to a 92p high, which was marked by a sharp retrace to 40p last month, the result of the global market meltdown.

It is probably fair to say that the high was very much up with events, whilst the 40p floor provided for an attractive entry point for others who had seemingly missed the boat able to get on board.

Right now of course, we are very much dealing with unknowns and uncertainty's where often cool heads are lost in moments of panic and where logic often goes out of the window.

From a personal perspective in the case of SDI, I'm happy to hold and await for further developments whilst a further reversal in the share price to the March levels may well provide for another buying opportunity.

Each to their own of course, but given Creedon and Ford's belief in continued organic growth progress and the potential for further additions, then SDI surely remains an attractive proposition for the long term.

Unlock the metrics for all these stocks and more...

Take a free trial

Facebook Twitter Youtube Instagram RSS

This site cannot substitute for professional investment advice or independent factual verification. To use it, you must accept our Terms of Use, Privacy and Disclaimer policies.

Unlock the metrics for all these stocks and more...

Take a free trial

SDI A Case of Chinese Whispers ?

Unlock the rest of this article with a 14 day trial

About the Author

Steve Hill

10 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...