Small Cap Value Report (Fri 6 May 2022) - SDI

6th May '22 by Paul Scott

67 comments 7484 reads

Good morning, thank goodness it's Friday!

Agenda -

Sdi (LON:SDI) - a positive trading update, and forecasts are raised. This buy & build group is delivering very impressive performance. It also sounds upbeat about the outlook for FY 4/2023. This looks an excellent long-term investment, in my view.

Explanatory notes -

A quick reminder that we don’t recommend any stocks. We aim to review trading updates & results of the day and offer our opinions on them as possible candidates for further research if they interest you. Our opinions will sometimes turn out to be right, and sometimes wrong, because it's anybody's guess what direction market sentiment will take & nobody can predict the future with certainty. We are analysing the company fundamentals, not trying to predict market sentiment.

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Sdi (LON:SDI)

173p (up 15% at 09:49)

Market cap £177m

Trading Update

What a pleasure to be reporting on some good news for a change!

SDI Group plc, the AIM quoted Group focused on the design and manufacture of scientific and technology products for use in digital imaging and sensing and control applications, is pleased to provide an update on trading for the year ended 30 April 2022.

Here are the main points -

Subject to finalisation of the accounts and audit, we expect revenues and profits for the year to materially exceed current market expectations1. Sales are expected to be approximately £49m (FY2021: £35.1m). We expect organic sales growth2 for the year to be in excess of 20%, which further builds on last year's 19% organic growth…

Adjusted Profit Before Tax3 is expected to be at least £10.5m (FY2021: £7.4m). We also expect to report very strong operational cashflows, significantly ahead of market expectations.

1. Analysts from our Broker finnCap Limited and from Progressive Equity Research regularly provide research on the Company, accessible from our website, and the Group considers…

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Revs8

6th May '22

Anyone know why K3 Capital (LON:K3C) sold off so suddenly today? Another buying opportunity to add to the list?

cmpeckham

"Tech mega caps are distorting things tho as many companies have already dropped more than this."

As is the case in most bear markets. Breadth declines before the headline indices. In 1999 tech names kept the US headline indices going for over a year while the majority of stocks fell. Market watchers seem to call this "narrow leadership".

"... don't just sell everything because the macro outlook is poor."

Indeed. In fact, buy as much as possible when the outlook is at its worst, because things will improve from there.

But, history shows that when the first derivative of the macro outlook is very poor, then it is indeed a good time to sell.

Boon

I too am an Itv (LON:ITV) holder and have been thinking whether to top-up or sell out. Still on the fence at the moment.

I won't rehash all the bull and bear points that have been well covered by others already - but it still strikes me as good value even if you expect a decrease in profits.

Even if you chop off -30% off FY22 EPS forecasts (and bear in mind we already had a good Q1 trading results in the bag), its still only at a 7.35x PE, with a 7% dividend with a still-healthy dividend cover.

I think M&A is a very slim chance now. Most media groups already have debt, so any strategic acquirer will need to fund it with fresh debt, which probably isn't forthcoming for Media M&A at the moment.

So I'm still mulling whether to sell or buy more. But in the meantime, I rest in comfort that the current valuation isn't too demanding, the debt load is manageable and long-term secured, and the dividend will provide me some inflation protection this year. There are worse areas to park my money.

(I Hold)

And right now, breadth in the S&P500, as well as FTSE100, FTSE250, and AIM are all quite low.

The problem is that conventional wisdom says to rotate into bonds when stock market breadth is declining or low. But....

Even gold hasn't been doing as well as it would have done in past market drops.

Where is safe to put one's money right now?

Heads up - if anyone holds Paypoint (LON:PAY) that you should sell now as the shares will go lower once they release a statement.

They will be impacted by the McColl's administration.

gringo

Wine and woman?

barnakles

Smiths News (LON:SNWS) - news out that they have £6-7m in bad debt exposure to £MCLS.

Bouden54

Just when you think the week couldn't get any worse. How an earth did they allow MCLS to run up so much debt given the obvious problems they are facing?

I think it depends on what you mean by "safe" and how long you'll leave it there, but I like the thinking behind the saying "do more of what's working and less of what isn't". Over the last few months my portfolio has moved towards: cash; selected commodities, agriculture and oil and gas names; infrastructure; REITs, particularly non-cyclical and other non-cyclical sectors such as Defence and Health incl. Pharma. Some of these are not "safe" (e.g. the oil price is probably near cyclical highs) but there are other reasons for holding them, including how they hedge other parts of my portfolio and personal risks, and the optionality they provide me if things go very badly.

ACounsell

Looks a bit like some of my returns YTD! Interesting thought on ETF investing and tech mega caps. Yesterday a number of NASDAQ constituents fell by c. 5% including £AAPL and £MSFT. These represent over 40% of the holdings in £IITU ETF. Overall the top 10 holdings in this ETF representing 67.5% of the funds value were down by a weighted average of 3.6%. However, the GBP version of £IITU was down less than 1%. It is probable that the remaining third of the value of the ETF went down by more than 3.6%. I assume this discrepancy between the price performance of the US constituents of this ETF and its UK price must be down to the falling pound as I can’t think of any other reason unless someone can put me right!

jonno

Well is this an opportunity to add to Smiths News (LON:SNWS)? It appears that Morrisons have agreed to clear up the mess left by Mccoll's Retail (LON:MCLS), including its debt?

bottomoftheheap

Yup, falling pound. $1.25 compared with ~$1.35 a month ago.

mojomogoz

Shares will bottom before the outlook does. Nothing is obvious, neither where the economic or stock bottoms are. But for sure inflation will be transitory...but in the meantime there is no doubt re inflation spike. The only way inflation will not be transitory is if a strong and durable credit creation cycle takes off pronto....anyone see one?...

Looks it's Asda from what I can see. I guess we'll find out more on Monday. In any event I think Smiths News (LON:SNWS) will be able to recovery a decent chunk of what they're owed and very unlikely they will take the full £7m hit, so could be a buying opportunity if its doesn't recover first thing.

RutlandRam

Can you translate that into English by any chance Mojo ?

JCPr

(I hold) but a wee bear case for Sdi (LON:SDI) is that they are being boosted by sales from their Atik camera unit for PCR testing. They forecast these would drop off this quarter but seems it hasn't happened yet, but sooner or later it will. I plan to continue to hold, but am tempering my joy at the lastest jump in the share price.

abtan

Sdi (LON:SDI) (no position)

Hi JCPr

You said:

"a wee bear case for Sdi (LON:SDI) is that they are being boosted by sales from their Atik camera unit for PCR testing"

This is what put me off buying over the last 12 months - the idea that the Atik Camera sales would be one offs.

I'm now struggling to understand whether the Atik orders are still one-offs in FY23 (as announced in January 2022), or if we should expect these annually for the foreseeable future.

In the last AR the company itself stated:
"There is no certainty of further orders once this contract has been fulfilled."

Note that:

the revenue boost from covid-related sales in FY21 was £6.1m (split between Atik and 1 other product - split not declared), which would be 12% of the £49m revenue reported for FY22.
Atik Cameras only filed Small Company accounts in FY21, so revenue must have been less than £10.2m. A boost of say £5m out of the aforementioned £6.1m would be quite material if it was lost.

I should also add that I'm put off my the large share issuance over the last few years, though I haven't looked at the detail for this so it might not be an issue.

---

On a less bearish note I'm wondering whether I should even care about Atik sales dropping post FY23. There have been a decent number of acquisitions in recent years, which will probably offset lost covid-related sales.

I remain on the side lines, but I must admit to being intrigued to see the detail in the final results.

GL all holders.

Yep, Morrison's approach has been rejected and the new Asda owner's have made an approach. Current news is that if successful they will take on the £170m debt, but they don't want assume responsibility for the two McColl's pension schemes. I agree that Smiths News (LON:SNWS) are likely to recover all or most of the debt.

The situation with McColl's does appear at odds with what was said in the recent Smiths News (LON:SNWS) webinar where when asked about its exposure to McColl's, Paul Baker, the CFO replied that there were being paid on a weekly basis in line with their expectations. This appears very much at odds with today's announcement.

Anyway assuming McColl's is kept afloat, which appears likely it will need to sell newspapers and unless there is an agreed arrangement on debt I can't see anyone supplying them. The only other UK newspaper distributor is John Menzies which is in private ownership. We shall see what the weekend brings?

9th May '22

According to Sky News, Morrison's have secured Mccolls. Good news all round I think. Importantly for contributors to the Mccoll's pension scheme who will avoid getting shafted. Also it would appear for Smiths News (LON:SNWS) and Supreme (LON:SUP) shareholders.

Small Cap Value Report (Fri 6 May 2022) - SDI

Sdi (LON:SDI)

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Paul Scott

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