Good morning all
i see that Sdi (LON:SDI) on the stockrank has dropped into the falling star territory, am I right in thinking that in the current covid 19 circumstances I shouldn't read too much into that as the whole world appears to be pretty confused about things or have I made a fundamental error on my assessment of SDI ?
ATB
David
My understanding is that the rankings in part are based on accounting data compared to peers and implicitly assume a stable environment. As there is lag between historic performance and reporting each company will be in a different phase of Covidness. As such Q will be in flux, V is now a guess, however, M might be useful as it is a mix of price momentum (reflecting demand/supply) and analyst forecasts which will reflect, with some lag, the latest thinking. However, it too has a mix of pre- and post-covid exposure.
If you take a view that we'll all soon get back to normal, then a snapshot of ranks pre-covid would be handy.
Personally I'm of the view that there will be a new normal. So a time for fundamental stock picking and/or momentum trading until some form of stability reasserts itself and a stable environment can be established.
What elements did you take into account with your assessment of Sdi (LON:SDI) ? What might the bears argue? You might get informed comment if you share these aspects ... or thumbs up if people concur. What may make it Covid proof?
apologies, your absolutely right, I forgot to post my reasoning
my thoughts were that the R/s was Letty strong at 29.8% and eps at 29.3% coupled with rice at 10.7, op margins of 15.3%, free cash flow increases year on year and a healthy cash balance looked pretty good numbers.
looking at their acquisitions, they seemed to be intelligent and in areas tgey already were fairly intertwined so no real departures into esoteric new industries.
atb David
I am puzzled by the analyst consensus on the stock report which shows a strong sell from one analyst (FinnCap).
I Googled FinnCap and SDI, and all I could find was a note from February 6th (i.e. pre-Covid fall) which gave a target price of 105p and said, 'SDI was selected in finnCap’s Slide Rule QVGM+ top 30 stocks in Q1 2020, reflecting the projected strong sales and EPS growth over the next two financial years of 30% and 31% respectively, buoyed by recent acquisitions but more importantly the rising ROCE. The prospect of sustainable organic growth is considered likely for this buy-and-build model given ongoing investment to support portfolio companies’ ambitions. These quality metrics are also seen in Judges Scientific (a larger buy-and build investment story), which despite three-year 9% EPS CAGR, trades on a FY 2020 P/E of c.25x and FCF yield of 4.2%. Given the successful acquisition and integration of 11 businesses over the past six years, and mindful of opportunities that still exist for SDI, we are raising our target price to 105p, which brings the valuation into line with Judges. This implies FY 2021 EV/EBIT and P/E multiples of 19.6x and 24.5x, respectively.'
Presumably FinnCap have updated their assessment since February.
I have held Sdi (LON:SDI) through the pandemic but am not certain whether or not this was a good decision. Of everything I am holding, this is by far the most negatively affected by the pandemic, albeit its still apparently profitable and cash flow positive.
The questions for me are:
Given the SP has come off a lot from the ATH of a few months ago, I suspect it is reasonable value at current levels and don't feel I have to sell because its all gone to pot.
However, if something that is obviously better value crosses my path, I reserve the right to switch funds from Sdi (LON:SDI) into that
Okay dusting off my old FA checklist the first thing I'd check is the Chairmans statement from 21st July:
We are pleased to report another year of growth in line with expectations, despite the impact of COVID-19. SDI Group has started the new financial year in a strong financial position and a number of our companies have seen increased demand for medical products which are being used to address the COVID-19 challenges. Other companies within the Group face some uncertainty and a downturn in orders although all our manufacturing facilities remain in operation. There are early signs of a return to normality in trading and overall SDI remains profitable and cash generative. For the financial year ending 30 April 2021 the Group expects to report year on year revenue growth and profits at least in line with FY20.
I'd have put weight on that final line.
Then a quick review of the notes just in case a gotcha is lurking there. There are some adjustments with regard to leases, EPS etc.. The Stockreports adjust these back and should be consistent across companies so I prefer these but at the time of release you have to DIY.
This bit is interesting, prudent or alarming:
In March and April 2020, as a precautionary response to the COVID-19 pandemic, the Group requested and was granted a deferment (to April 2023) of the quarterly repayment due in April 2020, and a waiver of the cashflow to debt service covenant for two quarters. Debt under the amortising facility at 30 April 2020 was £4,457k. The Group also drew down substantially all of its revolving facility, with loans denominated in UK Pounds, Euros and US Dollars totalling £4,876k, to maximise available cash balances. Leases in 2019 include only those leases formerly classified as finance leases.
Now to the stock report:
What would put me off would be the share dilution at a CAGR of 28%. I'd like to understand that a bit more. Possibly related to acquisitions, but if not that is a headwind against current shareholders.
Financial stability? F Score good. Z-score OK. Operating margins OK.
Tradeability? Oooh - spread. Apart from that someone bought a lot about a week ago taking advantage of a dip and increased liquidity.
On balance it looks to me as a relatively safe haven. So now I'd turn to the small cap report / discussion boards just in case I've missed something. I'd want contradictory views to counter any confirmatory bias. Damn ... Paul said it so much better than me.
But the spread would mean it would never get past my screens.
hi all.
many thanks for all your replies and thoughts. I have to admit, I had missed the deferment part and also the CAGR and indeed both of those raise interesting questions as to why.
ill continue to hold but keep a close eye on it.
ATB
David
Hi David,
The share count has increased historically to fund acquisitions.
Before the crisis it appeared as though SDI was getting large enough to fund these through cashflow and debt, so hopefully the placings will subside now.
I'm also a holder of £SDI. I'm surprised they have been hit so badly. I can only think that it's due to their structure. It's hard to know how each underlying company will cope, and that brings uncertainty.
I would really like to see more granular info for each underlying company at some point, rather than just the group level
Thanks
C
One key oddity with StockRank here lies in the Momentum Rank.
One element of the MR is the 3 month change in broker forecasts for the current year.
For SDI (LON:SDI) this -14% , which ranks them 702nd out of 990 companies for which this measure applies.
I saw a similar issue with another stock I hold Walker Greenbank (LON:WGB) . In a lot of cases, the brokers should have slashed their forecasts back at the end of March, but they didn't as they had no idea how bad to make them.
As SDI have now given an update, the analysts have something to go on to create a new forecast.
In reality the downgrade is more than three months old and quite possibly is upgrade to how negative they should have been in March.
Not only that, but this downgrade is also being ranked against many other companies whose forecasts have not yet been updated.
So personally I would not be too concerned at the deterioration in the Momentum Rank and change is style at this stage.
Unless of course you find other things that concern you as youkick the tyres.
finnCap is SDI's Nomad and generally does not put buy or sell labels on its clients so where the 'Strong Sell' came from is a mystery.
finnCap had forecasts and target price suspended as has been the case with many companies due to Covid19. Now that results are out it has issued a forecast (21 July) - eps as shown on Stocko and a target price of 100p which hardly implies a sell!
The target price is based on a comparison with Judges Scientific (LON:JDG) where the market gives a year1 forecast p/e of 27.5, saying "SDI offers equivalent long-term organic growth, rising ROCE/ROE and considerably stronger growth in the next two years".
