Ann: Media Release December 31 2016 Results, page-64

"Thinking of selling my NSR to buy this one. There is a lot of noise about REIT going out of the favour. Any thoughts?"

@zaidi675

Well, while I am not in a position to be dispensing investment advice to strangers on an online stock discussion forum, what I can do is tell you what I am doing based on my investment view on SDI and you can do with that as you see fit.

Starting with earnings:

As has been posted before, SDI exports 90% of its products so - while it has almost always consistently grown sales in constant currency terms - when the A$ fluctuates against other hard currencies, so too do SDI's earnings.

That's simply the nature of the beast and, while it makes for volatile earnings at the extremities of the exchange rate cycle, it creates some sensational buying (and selling) opportunities for people who understand appreciate this dynamic, as opposed to being scared of it.

Because the important thing is that SDI always emerges, at points in the exchange rate cycle, with higher levels of profitability than at previous corresponding points in the cycle.

So while SDI gets knocked about, intra-cycle, by currency movements, the company grows in intrinsic value over the course of each cycle.

For example, when the A$ when from 0.75c to above parity with the US dollar between 2009 and 2011, SDI's EBIT went from $5.5m to $2.0m.

And then, when the A$'s gains reversed between 2012 and 2016, and it fell to around 0.70c, SDI's EBIT rose, from $2.0m, to over $11m.

This financial year, we have seen the A$ strengthen by around 8% against the US$ (~25% of Sales are US$ denominated), and by almost 20% against the pound (Sales into the UK also represent ~25%), taking these rates roughly back to 2011 levels.

Most of this sharp currency adjustment took place early on in DH2016, the result being a 30% fall in DH2016 EBIT, to $2.94m from DH2015's record December half-year EBIT of $4.12m.

For the current half, JH2017, I expect a 32% fall in EBIT, to $5.0m, from JH2016's record EBIT result of $7.30m.
(Note: due to seasonality, EBIT for SDI's June halves are typically between 30% and 50% higher than is December halves).

Now, while the market should be anticipating that JH2017 outcome, given the transparency in historical exchange rate data, SDI is neither a very widely, nor very well, followed stock, so there could be, on the day the full-year result is released, some sticker shock impact on the share price, of a plus-30% decline in operating profit [*].

So you should possibly bear that in mind when it comes to timing any purchases you might want to make.

On the other hand, an argument in favour of buying the stock now is the fact that it is sure to have been affected in recent weeks (and will continue to be for the next two weeks, I am sure) by tax loss selling. SDI is a notoriously illiquid stock, so it doesn't take much in terms of a bit of indiscriminate tax-related selling to impact the share price.


While those are some of the technical factors you might want to consider when to comes to making your own purchases, I personally don't care much for finessing things when I want to buy a stock.

So I have been buying the stock over past months, taking advantage of some of the elevated liquidity on some days.

I have doubled my position since the beginning of the year, to a little under 3.0% of my invested capital. All things being equal, I expect to end up with a 3.5% holding by the time the company reports its full-year results. And if the stock falls on the result, which I expect it might given the discussion above, then - provided there is nothing contained in the result that makes me change my fundamental opinion of what the business is and what its prospects are - I will continue to buy until I reach a 4% portfolio position.

Which, for me, will be an over-sized investment for an illiquid microcap stock.


[*] For what it's worth, my full-year forecasts of salient financial figures for FY2017, with 1H:2H splits, are as follows [FY2016 figures in square brackets for comparison purposes]:

Revenue = $73.0m ($34.4m : $38.4m) [$74.1m ($34.7m : $39.4m)]

Gross Profit = $43.2m ($20.7m : $22.5m) [$46.1m ($21.6m : $24.5m)]
Gross Profit Margin = 59.2% (60.2% : 58.3%) [ 62.2% (62.2% : 62.2%)]

EBITDA = $11.9m ($5.0m : $7.0m) [$15.5m ($5.9m : $9.6m)]

EBIT = $7.9m ($2.9m : $5.0m) [$11.4m ($4.1m : $7.3m)]

Pre-Tax Profit = $7.7m ($2.8m : $4.9m) [$11.1m ($3.9m : $7.2m)]

NPAT = $5.4m ($2.0m : $3.4m) [$7.6m ($2.8m : $4.7m)]

EPS = 4.6cps (1.7cps : 2.9cps) [6.4cps (2.5cps : 3.9cps)]
DPS = 2.2cps (1.0cps : 1.2cps) [2.0cps (0.8cps : 1.2cps)]


Operating Cash Flow = $5.6m ($1.6m : $4.0m) [$8.8m ($1.1m : $7.7m)]
Free Cash Flow = $1.9m (-$0.6m : $2.5m) [$4.3m (-$0.7m : $5.0m)]

Net Debt = $0.4m (@31 Dec. 2016 = $1.7m; @30 June 2016 = $0.3m net cash)

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