Small Cap Value Report (Fri 27 July 2018) - SDI, JUP, G4M, Vertical Integration
Good morning!
After what feels like a manic week, it's nice to have a Friday that isn't bulging with news flow.
Following on from my comments yesterday on US markets, Facebook finished down 19% and is now trading at a forward P/E ratio 21x (using Stocko numbers). That's low enough to get me interested. So I'm tempted to have a dabble.
The NASDAQ fell by 1.4% yesterday, and is up by 26% over the past year (according to Bloomberg). So the end of the world has not arrived yet, despite all the scary headlines!
Today we have:
- Scientific Digital Imaging (LON:SDI) - final results
- Jupiter Fund Management (LON:JUP) - interim results
- Gear4music (LON:G4M) - trading statement
- Seeing Machines (LON:SEE) - OEM design award
Scientific Digital Imaging (LON:SDI)
- Share price: 44.55p (+10%)
- No. of shares: 90 million
- Market cap: £40 million
This is an acquisition group making niche scientific products.
I last covered it in January, at the interim results statement.
At the time, I said it looked fairly valued. The share price has gone on to increase by an additional 50% since then! It's making fresh all-time highs today.
My concerns have centred around SDI's increasing share count. The pace at which the share count was increasing made it extremely difficult to predict the future of the company and the likely returns for existing shareholders, in my view.
However, it has been suggested that growth in the share count is going to slow down now, and that future strategy could be more along the lines of Judges Scientific (LON:JDG) (i.e. using some debt from HSBC and internally generated cash flows to fund deals, rather than relying primarily on new equity).
Let's now take a look at these results:
- revenue increases from £10.7 million to £14.5 million. 31% of the revenue growth is organic, so by my calculations the organic revenue growth is £1.2 million.
- gross margin improves to c. 66% (SDI has been collecting companies that have a supplier/customer relationship, so this is unsurprising)
- operating profit nearly doubles to £1.8 million, or £2.1 million before one-off costs and share-based payments.
Capitalised development spending: SDI capitalised £600k of development spend, instead of putting it through the income statement.
At the same time, it did put an amortisation charge on its income statement (i.e. writing down previous development spend) of £530k.
These numbers are close enough to balancing out, so I wouldn't view it as suspicious.
Earnings per share makes a huge percentage increase to 1.79p per share.
That's a great result. The acid test of performance for me, however, is return on capital employed (ROCE).
ROCE is the test which can trip up a rapidly-expanding business even when all the other metrics (sales, operating profit, EPS, etc) are looking good. It punishes a company for expanding its capital base without generating sufficient returns on this new capital.
I will use a simple textbook definition: EBIT / Capital Employed, where Capital Employed is the average value of total assets (less current liabilities). There are other ways to define it, but this is a straightforward method. I will add back the one-off acquisition and fundraising costs to EBIT.
Feel free to look for errors or pick holes in my calculations:
The bottom line is that I think SDI's ROCE has improved in FY 2018.
That's a fine achievement, especially considering that it was carrying a lot of fresh capital.
The last major fundraising was in December 2016, and I have taken the timing of this fundraising into account when calculating the Avg. Capital Employed during FY 2017.
I should mention that Stockopedia takes a stricter view and calculates trailing ROCE at 10%.
Anyway, tihs result means that I'm automatically going to take the view that management are allocating capital in a reasonable way - the numbers say that they are.
Trying to understand the underlying businesses is a separate matter, and a huge task. We have the following companies and brand names:
- Atik Cameras, Opus Instruments, Quantum Scientific Imaging, Applied Thermal Control, Astles Control Systems, Sentek, Synoptics, Syngene.
Some of these are contributing organic growth, and the group as a whole is clearly doing well in the aggregate. That's really all we can ask for! It seems to have a healthy amount of diversification now.
Dividend - not yet, but the matter is "under review". If the company can continue deploying capital at a 14% return, I think it would make sense not to pay one yet.
Outlook - confident of "profitable growth through increased revenue and new acquisitions in 2018-19".
My view - I didn't think I would be saying this, this morning, but I've seen enough now to buy into what SDI management are doing. The plan has been executed and has succeeded so far.
With improved diversification and with the increase in share count hopefully slowing down, it now looks to me like a lower-risk investment with the potential for compound growth.
This is reflected in a much higher share price, so I am a bit late to the party. Well done to those who backed it at an earlier stage!
It's not priced at bargain levels any more, and that is fair enough:
Jupiter Fund Management (LON:JUP)
- Share price: 421.55p (-5%)
- No. of shares: 458 million
- Market cap: £1,929 million
A quick word on this fund manager.
This has been on my watchlist for a while for a potential purchase, and I do consider it to be in value territory at the moment.
EPS of 17.3p has been achieved in H1 2018, a small improvement compared to the equivalent period last year.
I think the last 12 months of EPS add up to 35p. So we have a trailing P/E ratio of 12x.
The problem is client net outflows and a reduction in AuM.
From a competitive point of view, mainstream fund managers are at risk of losing out in the battle for AuM as traditional active management looks somewhat dated, except for those managers with a very strong track record and/or expertise in a specific niche.
Encouragingly, it is disclosed that Jupiter's fund outflows were "driven by redemptions from a single product within our fixed income strategy". Most products appear to be doing ok.
Margins are likely to fall gradually over time, and FY 2018 EPS is likely to show a small reduction versus FY 2017 EPS.
Despite that, I think these shares represent an interesting opportunity.
The balance sheet is fine and management have expressed confidence today by raising the dividend.
Jupiter has paid a special dividend every year for the past four years, and yet even if we exclude that, the yield is currently 4.3% (with it, the yield is more like 8%).
You do have to form a view on the outlook for active managers, which is undeniably rather mixed. But as Impax Asset Management (LON:IPX), Miton (LON:MGR) and others have shown, there is still plenty of demand for some active managers.
Gear4music (LON: G4M)
- Share price: 676p (+3%)
- No. of shares: 21 million
- Market cap: £141 million
AGM Statement and Trading Update
This has been a favourite of Paul's, who last covered it in May. I wrote about it in March.
The CEO doesn't give too much away today. Trading is in line with expectations:
"I am pleased to report that revenue growth continues to be strong into what is a highly competitive market, and the projects to relocate our Swedish distribution centre and upgrade our UK distribution facilities are on-track to be delivered ahead of our peak trading period."
I perhaps shouldn't have included this in today's report, since it's such a brief statement. But I suppose when expectations are upgraded or downgraded next, this can act as a bookmark for people checking back in the archives.
For me, much of the value is in G4M's potential to develop its own-brand products, which were last reported at 26% of total sales. I wouldn't be interested to pay a heavy valuation for something that is just a distributor.
The StockRanks aren't convinced yet, calling this a Sucker Stock:
Vertical Integration
Seeing Machines (LON:SEE) announced a new OEM design award today, but I honestly have no idea what that company is worth. So instead I'll finish today's report with a simple illustration of an important concept mentioned in the comments: vertical integration (when a company owns its supply chain).
Suppose we have two companies: Supplier Co. and Client. Co.
- Supplier Co. makes products only for Client Co.
- Client Co. purchases inventories only from Supplier Co.
- They each make a gross margin of 33%
This is what they look like separately. The transaction value between them is shown with a grey background:
In other words:
- Supplier Co. buys inventories for £4 and sells them for £6 to Client Co.
- Client Co. buys inventories for £6 from Supplier Co. and sells them for £9.
Now suppose the two companies are merged instead of operating separately.
The new, consolidated financial statements don't show the £6 transaction value between Supplier Co. and Client Co.
Instead, the income statement looks like this:
Only the revenue and COGS that relate to external parties are shown, i.e. the £9 sale by Client Co., and the £4 inventory purchase by Supplier Co.
The gross profit of the combined group is the same as the sum of the gross profits of its subsidiaries.
The gross margin (56%), on the other hand, is now bigger than the gross margin of each of its subsidiaries.
This is vertical integration in simple form!
It's been a busy week. I hope you have a relaxing weekend!
Best wishes
Graham
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52 comments
Interesting vertical integration comments. All of it is true in theory. But it might be taken to imply that companies should always be vertically integrated to boost profit margins. From an investor perspective we aren't interested in margins but the return on capital.
So Apple shareholders benefit from the group contracting out the capital intensive business of making its products. Coca-cola generally keeps the capital intensive bottlers separate from its main business. Companies that franchise out do so for the capital intensive part of their businesses i.e. Domino's Pizza.
Secondly, it is important to recognise that companies generally do better when they are focused. Fever Tree outsources out bottling and other activities. Its total workforce is relatively low. This has allowed management to be focused on its brands and product innovation.
What can work is if a supplier cuts out a distributor from the chain they can improve their margins. I.e. Amazon selling direct. Startup razor blade companies selling direct to consumers.
But is a strategy of being vertically integrated helpful? The UK pub sector used to be vertically integrated in terms of beer. This appeared to lead to less consumer innovation and focus. Wetherspoon's doesn't own any brewing businesses it just focuses on pubs and has done very well.
The trouble with vertical integration is that you lose the competitive element of being able to choose your best suppliers. You are your own supplier. Having a stream of competing suppliers can lead to greater innovation.
Heineken and C&C have bought pubs in the UK to help in terms of supplying the end customer. However, I am not sure this is such a great idea. Better to make a product that customers want at the existing pubs. It might be considered a failure if you have to buy the end consumer facing unit in order to sell your products.
Distribution is a competitive advantage which I think Diageo has. So if they own their distribution network that really helps with pubs/bars finding them easier to work with then a competitor with a weak distribution system.
Thanks Graham for your commentary on Jup,they have also been on my watch list for a while & are likely to remain there for a while longer .One point with Fund management businesses which you are probably aware of is that they normally trade on average 3% of AUM , Mr market is being quite efficient in valuing them accordingly.
You're welcome - thanks for the point on Jupiter Fund Management (LON:JUP).
Economics of vertical integration: The main economic benefit of vertical integration tends to be the elimination of the ‘double-marginalisation’ inefficiency. This arises because, when not vertically integrated, both the upstream and downstream businesses independently want to maximise profit, but neither cares about the impact that the price they set has on the other business’s profit. So if I was the downstream business I would want to set a high price to maximise my own profit, not caring that this would also reduce the demand for my supplier and their profit (and vice versa). When vertically integrated, the upstream price is internalised and I can set a single downstream price that maximises the profit for me and my supplier collectively. This price would be lower and the overall profit higher than before the vertical integration. This is why vertical mergers are nearly always good for competition, benefiting both businesses and consumers alike...
Scientific Digital Imaging (LON:SDI) really interesting discussion here, it’s why stocko better than so many opionion sites, I would say email, or call the ceo on these points, he is very very approachable. I’d be very interested to hear his response to some of these more technical accounting questions. As earlier, I hold, and would ask myself but wouldn’t know how to quiz him.
Graham,
I menioned $FB (Facebook) in yesterdays SCVR comments, and decided to jump in this morning with a very small punt on LSE:2FB. I read up on this last night, and will do some more DYOR, but as far as I can see, it's basically a 2x investment on the underlying Facebook share - it dropped >35% yesterday, as opposed to $FB 19%. Another benefit (for me), was that there is no (1%) FX charge, as it's a GBP 'stock'.
IF $FB rises 40% over the next 6 months (see my post from yesterday), then I believe my £2FB investment will rise approx. 80%.
Be careful with leveraged exchange-traded products like these. They are ok for very short term trades, but they are horrible to hold for any length of time, especially on a volatile underlier. They don’t double the total performance over your holding period, they double the daily returns. Which leads to some side effects.
Imagine you buy your product at 100p. FB (at say $200 when you bought it) goes up 5pc to $210 - great! Your product now trades at 110p, up 10% because it is twice leveraged. The following day, FB sinks back down to $200 - a 4.76% fall. Your leveraged product will decline by 9.52%, that is, to 99.5p. So you have managed to conjure up a small loss despite your underlying being flat.
The longer you hold it for, the more leveraged the product is, and the more volatile the underlying is, the faster and harder this will hurt you. You’ll get nowhere near 80pc if it goes up 40pc in six months - unless it goes up literally in a perfect straight line. And this drag happens too if the stock goes down, making the losses even worse.
Taking things to extremes - if FB goes down 50pc in one day, your product becomes worthless. If FB recovers, you get none of that as your product won’t exist!
Much better to just buy the underlying.
Scientific Digital Imaging (LON:SDI) - I appreciate and get the comment and am in agreement, however I just place my views on the simplistic level, each to their own.
Yes ratio-investor - In the event of one-off 'growth' capex, due to say infrastructure investments, then one just needs to use a through-cycle level of spend instead - ie to see what the underlying CRoCE really looks like.
Hence understanding the returns the company is currently generating, what is likely to do under steady-state conditions and importantly how it's going to get there and when.
Thanks. That is a bit harder then it seems surely? Estimating steady state capex. Could you just use depreciation for the steady-state capex?
Your measure is interesting as companies with large pension deficits or that do acquisitions will be penalised. Acquisitions are likely to lower returns as they will be done for a premium. This is particularly the case in the short-term given that synergies take time to come through.
Personally I like to have a a return measure with and without goodwill. Excluding goodwill gives you an idea of the returns of the underlying business irrespective if they are acquisitions or not.
My concern with SDI would be that the directors all seem to have financial or admin backgrounds which must make it difficult for them to assess the quality of the manufacturing and technology companies they are buying.
I would prefer the people running the company to have hands-on technical experience in the type of sector(s) in which they are investing. On the other hand, I suppose they could run SDI like an investment portfolio and this could be successful.
FYI Graham
Rather than ROCE, I prefer to use underlying "Cash Return on Capital Employed" (CRoCE) - which likewise can be lifted straight from the accounts. (CRoCE = (Adjusted operating cashflow – capex - tax paid) / (Net assets + net debt + pension deficit + Acquisition goodwill write-backs)
If it is decreasing, then you know that any acquisitions/investments are destroying value (as was the case with Tesco’s for years when it was expanding overseas). Plus CRoCE needs to be above the group’s "through cycle" cost of capital – which for say RPC plc (acquisitive plastic packging producer - as an example ) I would pitch at around 8%-10%. Hence doing the maths, RPC’s 2016-18 CRoCE appears a bit light – hence the investor skepticism. Albeit the Board are obviously hoping that this will improve going forward.
RPC plc CRoCE
Mar'18 2017 2016
AOCF £520m £414m £232m
Capex (£246m) (£180m) (£104m)
Tax (£38m) (£23m) (£14m)
Adjusted post tax cash £236m £211m £114m
Net Assets £1,920m £1,823m £894m
Net debt £1,139m £1,049m £744m
Pension deficit £197m £256m £150m
Goodwill w/back £0m £0m £0m
Capital Employed £3,256m £3,128m £1,788m
CRoCE 7.25% 6.7% 6.4%
Paul, Thanks for that. That is the same as the CROCI outlined in Phil Oakley's book I think. The only trouble with that measure is that if capex is being stepped up this may hit near-term cashflow. So the ratio may be low when in fact capex will benefit the business and lead to a higher CROCI a few years out. So I use CROCI and ROCE together. For example, I am guessing that the CROCI for Dart (LON:DTG) was not good while they were investing in these new planes and expansion.
I guess with a low CROCI you have to ask is it because of growth capex and then if this is true will the growth capex deliver. In your example for Tesco the growth capex was a failure in terms of the returns it generated (i.e. US expansion etc).
Hi Paul - thanks for the input! CRoCE is a very cool concept. A nice explanation.
Are you saying 8-10% is the typical hurdle rate for a company to be said to have created economic value? Sounds reasonable to me. I look for something similar (>10%, say) in ROCE. If the company would get a better risk-adjusted return by investing in an equity ETF rather than making additional capex, then I would prefer if it bought the ETF!
Best wishes
Graham
Scientific Digital Imaging (LON:SDI) - Good to put in a ROCE calculation in there. I would personally also add in the long-term average ROCE that the company has achieved. This is because ROCE is a "flow measure" rather than a measure for one year. I.e. we are interested in the long-term ROCE rather than one year's ROCE.
Secondly, I also do ROCE without goodwill to get an idea of the underlying franchise of the business. So you have an ROCE and an ROCE without goodwill. For both measures I would exclude acquired intangibles in the balance sheet and the amortisation of acquired intangibles.
Interesting that you say that the Stocko Ranks "are not convinced yet" about G4M and call it a "Sucker Stock".
This time last year, G4M was a "High Flyer" but it has suffered a bit of a crash in the Quality Rank since then (because ROCE and other metrics have fallen after a previous great year.)
Maybe calling G4M a "sucker stock" now is a bit harsh at this point though!
Interesting comments regarding Jupiter Fund Management (LON:JUP). They are traditionally seen as a retail-focused fund group but have recently made some key strategic hires to expand their institutional distribution capability. I see that as a potential positive if it manages to offset AUM outflows on the retail side. Many institutional investors (big pension funds, endowments and so on) continue to be willing to pay up for active management where they see it as adding value. And as Graham has pointed out here before in relation to Impax Asset Management (LON:IPX) (I think!), institutional money is less "fickle" than retail money, with investors more willing to ride out short-term market volatility and stick with a manager they have conviction in.
Scientific Digital Imaging (LON:SDI) is an interesting study from another aspect that I have noted before: if you are looking at the Stockreport and have stockrank settings (far top right) on "Ranked vs UK and Ireland Peers" you see a stockrank of 63, but if you change the ranking to "Rank vs European Peers" there is a small rise to 65, where Momentum increases to 87 although Q and V fall to 68 and 22 respectively.
But now try changing to "Rank vs Global Peers" and it shoots up to 71 with iprovements in Q and V to 73 and 28.
What is going on? Presumably the Global peers are performing badly enough to offset weaker brethren in both the UK and Europe who are presumably also included in the Global ranking
I like the quick check of using these rankings and of course Ed uses them for the NAPS selection and other analyses, but can he or others explain maybe how the peers are selected and which rankings are used for NAPS?
Re. Scientific Digital Imaging (LON:SDI)
Atik Cameras Companies House Link for any interested:
https://beta.companieshouse.gov.uk/company/05948849/filing-history
Hi Graham, as it's a slower day today, any thoughts on the recent drop in price of H & T (LON:HAT) (and also Ramsdens Holdings (LON:RFX) in the same sector). I know you follow these fairly closely. They have both suffered material falls over the past weeks - I am assuming this must largely be down to a slight dip in the sterling gold price as I can't see anything else that would explain this? The fall of Ramsdens has been larger but that is likely down to the director sales there recently. These both still strike me as robust and steadily growing businesses and are looking ever more appealing at current levels, but I wonder if I'm underestimating the impact of the gold price if this is truly what the market has wobbled over - any thoughts? Many thanks!
BIACS
Hi BIACS, I still hold H & T (LON:HAT) and have made no recent purchases or sales. The gold price has been a bit weak, that's right. Part of the reason I hold H&T is that I like to be long of gold, so I don't mind it moving in tandem with that. I don't know of any other reason for the share price weakness. It's an interesting question though, cheers. G
If you're interested in Ramsdens Holdings (LON:RFX) there are some interesting in comments on page 7 of today's quarterly investor letter from Downing Strategic Micro-Cap Investment Trust (LON:DSM). (https://www.investegate.co.uk/down-microcap-invtst--dsm-/rns/statement-re-investor-letter/201807270700049186V/)
Ramsdens is one of the eleven positions held by the fund and Downing have good access to management as they hold 15% of the shares.
I was forgetting market conditions when I bought as many people are doing staycations this year. Ramsdens is also Foreign Exchange. On the beach and Thomas Cook have been going down.
Cenkos Securities (LON:CNKS) is in the news today: "activist investor investor urges stockbroker Cenkos to put itself up for sale". No comment from either company.
I've held Scientific Digital Imaging (LON:SDI) in the past but sold out once I discovered use of the words "intra-company sales" in one of their old reports (yes, it was only the one report).
They rarely, if ever, mention intra-group sales and I only found out more by emailing the company, though kudos to them as they replied promptly with figures.
I haven't read today's report in detail but they do (finally!) make numerous mentions of intra company revenues - it's a shame that they don't seem to quantify them. Until they do I won't be investigating further as it makes it too difficult to truly see how each subsidiary is performing.
Hi Abtan
This is helpful insight so I don't know why you got a down thumb (which I have reversed with a thumbs up). I received one too for my earlier post so all i can assume is that there is someone here who doesn't want to hear anything negative about Scientific Digital Imaging (LON:SDI). Judging by the hysterical noise on various BBS I suspect you and I have incurred their wrath. More fool them I say.
cheers
Francis
PS: I noticed when Graham commented on Plus500 (LON:PLUS) vs IG Group (LON:IGG) a few days ago he also got the same treatment.
Hi Francis
I too was surprised by the thumbs down, so thanks to you (and the other person) for the x2 thumbs up.
I too thought my comment was insightful, so the retaliatory wrath was promptly ignored.
It's a real shame that the intra-company sales are not included as cash generation looks impressive.
Cheers
Hi abtan, are you worried about the trustworthiness of SDI's income statement? Apologies if this is old news to you but the income statement always excludes intra-company transactions.
Making intra-company sales improves the gross margin for the group PLC, it's a good thing! G
"Making intra-company sales improves the gross margin for the group PLC"
Not sure how you arrive at that conclusion. At the group level they should be a wash - with the sale cancelling the purchase.
Yes, at a group level the "sale" doesn't exist. Higher gross margins arise from the vertical integration.
Hi Graham
I dug up an email from the Scientific Digital Imaging (LON:SDI) CEO last year.
My question: "Is revenue being booked within one subsidiary, with a commensurate COS in another subsidiary?"
His response: "Yes the journal entries are though the sales and cost of sales"
I see what you're saying, but based on his response the journal entries are the same, so no impact to GM. Unless he misunderstood my question. Or I misunderstood his answer.
Cheers as always
A
Hi Graham
As usual Stocko completely crashes when I try to include a link to Companies House, so I'll start this response again.
In answer to your question, there is a (healthy?) dose of scepticism towards the company as I would prefer to see figures behind each subsidiary, with a split of intra-company sales. Looking at things on a consolidated level is fine, but I definitely like diving into the detail.
I remember a while back (maybe a year ago) trying to go through the subsidiary reports at Companies House, but then not really knowing how accurate they were, specifically due to the intra-company sales. It would make it far easier if Scientific Digital Imaging (LON:SDI) simply included this. And I don't know why they wouldn't to be honest; I see plenty of other companies include them in their reports.
On a slightly different note I vaguely recall checking out Atik Cameras on discussion boards. The reviews weren't bad but they weren't particularly special either.
One more thing I've just recalled from glancing through today's announcement was that profit was positively affected by a "one-off retrospective licencing payment for the sale of Auto-Montage imaging software in Synoptics' sales."
Again, it's a shame they don't quantify what this was as it seems important! Or if they did, I probably missed it and am happy to be corrected.
I'll continue to watch on the sidelines and no doubt regret my decision as there seems a lot right with Scientific Digital Imaging (LON:SDI).
Cheer
A
Fair enough abtan, thanks for elaborating your position on Scientific Digital Imaging (LON:SDI). Sounds like you've been doing a lot of quality research into it.
Although I like what I read about it yesterday, I still don't own any SDI shares. So we have that in common - still watching it from the sidelines!
Best wishes
Graham
Just posted the 5th (of 7) AI presentation from the Newgate Redleaf AI conference. We thought it was an interesting area, and all the presentations give a great overview of what's going on with AI.
Here's Matt Hooper's presentation, SVP Global Marketing at IMImobile (LON:IMO): AI and improving the customer experience:
https://www.piworld.co.uk/2018/07/27/newgate-redleaf-ai-conference-imi-mobile-ai-and-improving-the-customer-experience/
Great first hand insight to AI and how it might evolve in customer service.
Re Scientific Digital Imaging (LON:SDI) I spent an hour on the phone to the CEO about 9 months ago, presents as very honest guy, chartered accountant, obsessive on the numbers, very shareholder focussed. Judges scientific type model. He said most owners sell but stay on to keep building the technical products, so they take cash out but keep doing what they enjoy. If anything the CEO was too cautious, IMO, as we discussed a separate CFO or sales director, he didn’t think needed but was thinking about it and starting to receive CEO coaching. In May they appointed a CFO. I took a position at the time. A lot of sales very specialist and subject to university funding but over all profitable, debt ok, moat and honest management. A lot of growth through acquisition but the ceo said loads of targets with very little completion so no need to overpay and target has to be eps enhancing.
For those that may find it of interest, some of my thoughts on Scientific Digital Imaging (LON:SDI) pre and post open...
Final Results For The 12 Months To End March 2018
Revenue up 35% to £14.5m (2017: £10.7m) with Adjusted PBT up 70%+ by £991,000 to £2,300,000 (2017: £1,309,000).
I have not looked at this before but it has recently appeared on my Standard Tech Screen. I like the look of this update and may well look to take an opening position here. If not it will go on my Watchlist.
Subsequent Note
After reading an updated broker note on Research Tree I changed my view to Neutral.
Latest results show that Revenue Growth and EPS Growth for 2018A were both about 40% or so. Annual Revenue growth for 2019E and 2020E is forecast as 5% or so and Annual EPS Growth for both years is forecast as <5%. With a PER of 17 or so it just seems too expensive here at this price.
Matylda, my comeback to that would be twofold:
1) Forecasts look lowballed. I used to actively avoid companies where forecasts seemed to imply low growth until I realised that for some companies, forecasts are genuinely lowballed so they can be raised through the year. I think there's a little bit of upside on this basis albeit not a lot
2) the real upside is acquisitions. Put it another way, if they added on £3m of debt but had 2.75p of EPS and that corresponding level of year over year growth, would you buy? I ask because thats almost part of their strategy; to buy accretion in adjacent businesses. I'm not saying 2.75 is the right number but in essence, making a decision based on the current forecasts, which have no m&a which will almost certainly happen, is the wrong way to look at SDI IMO.
Again, Judges Scientific case in point. Hasn't really looked cheap when you ignore their acquisitive growth, but has been a superb performer.
To boot I'd ignore the target prices of mamy brokers. Too ad hoc. Nearly 4.5% FCF yield at the current price not expensive
Thanks for bringing Scientific Digital Imaging (LON:SDI) to my radar, Matylda.
I have (just now) started a free subscription on Research Tree, though this doesn't give me access to very much, and I can't see all the detail that you have written based on the upgraded broker note :-( I don't know much more about SDI than what I have read in the results today, but I am inclined to challenge the broker note. In the final results they have achieved 11% of organic revenue growth, with the remaining £2.62m of revenue from acquisitions, neither of which were part of the group for the entire year. On this basis, it would seem to be an incredibly pessimistic view that they will only achieve 5% revenue growth, which is less than half of the organic growth just shown and doesn't take any account of acquisitions either. The part of the note that I could read says they have updated their EPS forecase for P19 by 3% - isn't that a good thing?
I haven't bought in as yet, because there are a lot of sell trades going through, including a 100k block... but perhaps this is profit taking after a very strong 12 month run...?
Morning Graham,
I'd also be keen to hear your thoughts on Scientific Digital Imaging (LON:SDI) (I have taken a position this morning).
Many Thanks,
IG
Re: Scientific Digital Imaging (LON:SDI)
I don't know anything about this company so had a quick look this morning. The observation I would make is that for such a small firm (£14.4m sales) it seems to be generating its revenues from a lot of different markets and with a lot of different brands.
I am not privy to their strategy (please enlighten me if you are) but they are too diversified for me to invest in them. Trying to compete in 6 markets with 5 brands seems crazy to me.
This is evidenced by its finances. It has impressive gross margins of 65.8% but a relatively small number drops to the bottom line (PBT £1.7m). This suggests it has high operating costs in sales and marketing which are being dissipated across all the markets it serves. Surely it would be better to focus on fewer markets and address customers who will buy several of their products?
I'd love to hear from anyone who knows more.
cheers
Francis
Hi Francis
They're a buy and build biz in their chosen markets - they've done very well in executing it over the last few years. Essentially being able to bolt on complementary businesses (many of the divisions use each others products), gain some synergies and cross sales but also pay relatively low multiples and so benefit from earnings accretion
Their EBIT margin of 13% adj is decent in my view. The perfect analogy for SDI is Judges Scientific, a much larger business but one which has demonstrated that this strategy can work successfully. Forecasts for fy19 are 2.4p adj EPS before any acquisitions. I reckon that will get to 2.6p from accretion by calendar year 2018 end, as they plan to make at least one purchase this year - it's a fragmented mkt
Operating leverage ironically improves as they buy more businesses. EMG. They bought a company called QSI which was Missouri HQd, took the relevant parts and manufacturing and moved it to their Lisbon HQ Atik Cameras business. Operating leverage will become evident as they buy further and consolidate supply chains and customer lists.
Hope this helps
Scientific Digital Imaging (LON:SDI) please Graham, final results show strong growth (benefited by acquisitions though there is organic growth too) and it looks like an interesting product with I would have thought high barriers to entry
Morning andrea! I will cover Scientific Digital Imaging (LON:SDI). G
Thanks Graham, have a nice weekend :-)
£G4M AGM statement "I am pleased to report that revenue growth continues to be strong into what is a highly competitive market, and the projects to relocate our Swedish distribution centre and upgrade our UK distribution facilities are on-track to be delivered ahead of our peak trading period. The Board remains confident in meeting their expectations for the financial year."
apologies for the off topic as not sure where else to ask, I'm seeing some very strange market maker names on my advfn level2 this morning, eg WNTSGB, WSMM12, PLHCGB, CFEQGB, SNGRGB & SHOCGB, I'm struggling to understand why and whether this is something new to expect, also what the mms names were before, I'm assuming for example that WNTSGB was WINS but I'd appreciate help on the others and an offer of explanation
Thanks
threeputt... poor form asking an off-topic question from another website/service provider but anyway... codes can be downloaded from the London Stock Exchange; here: https://www.londonstockexchange.com/traders-and-brokers/membership/member-firm-directory/member-firm-code.xls
You will find all of your listed.
Thanks Carcosa, apologies if any offence as none intended. I only mentioned the service provider as it thought it may be an issue with them only, as far as I know Stockopedia don't provide a level2 service so I'm not sure it's a particular problem
Seeing Machines (LON:SEE) design win:
https://investegate.co.uk/seeing-machines-ltd--see-/rns/oem-design-award/201807270700049364V/
I wasn't expecting anything until the end of the summer due to decision makers being on holiday and so this is a welcome surprise. When I saw the title I was hoping for Toyota (probably the largest manufacturer in the world) who were rumoured to be imminent. Given they are Chinese, I'm hoping it is Geely (Volvo and "London" taxis) as this was predicted by safestocks.co.uk and so would give further credibility to their sources and other (often wild-sounding) claims. If it is not Geely then there are at least 4 others it could be of a similar size. A consensus about who they are is likely to form fairly quickly through official confirmation of the tier 1 and anonymous sources.
Other than this announcement, selected rumours are:
* There is a competitor with a similar system, but it is inferior. This is good news as I maintain that camera-based monitoring could not be mandated by law with a single supplier.
* The US is more receptive to camera-based monitoring whereas in the EU there are some consumer privacy concerns (although video is not supposed to be stored, it is difficult to prove it isn't and at the end of the day there is a camera pointing at the drivers face however you disguise that).
The sum of the announced OEM contract sizes and the current size of Seeing Machines (LON:SEE) 's fleet business does of course in no way justify the current market valuation. This relies on the actual revenue being at least an order of magnitude larger than these minimums and probably further OEM wins and/or considerable fleet / rail / other business growth. Share price movements over the last few days underline that this is an extremely speculative share that is dependent on unpredictable newsflow, rumour and speculation to maintain its current valuation let alone support rises. I hold.
RE Seeing Machines (LON:SEE) 'The estimated lifetime revenue value of this program is more than A$10m based on initial models included in the agreement. The first material production revenue is expected to be recognised in Seeing Machines' 2020 financial year. ' That's only 7,630,950.00 Pound sterling but it's important as a new market opening, imo. I hold (should have topsliced higher though!)
My morning smallcap tweet:
Seeing Machines (LON:SEE), Holders Technology (LON:HDT)
Seeing Machines (SEE) design win, working with a major Tier 1 partner, for a Chinese OEM to deliver Driver Monitoring using SEE's FOVIO Chip. Mass production is scheduled from 2019. No numbers. SEE grandly states it makes "AI powered operator monitoring systems". The FOVIO chip has algorithms optimised using machine learning but there's no AI in it.
Holders Technology (HDT) H1 swings into profit. EPS 1.56p (-1.56p) on rev up 7%. "Following the LED restructuring reported last year, I am pleased to report that both LED divisions made good progress." Don't know if it's in line. No forecasts for this nanocap.
African airline Fastjet (LON:FJET) £1.6m Open offer actually raises £0.22m (presumably before costs!). That's about 0.22m too much..... Surely by now their largest shareholder Solenta Aviation should pull the plug? This was the sixth occasion FJET returned to the market for cash recently.
Hopefully gives time for employees to find other jobs.