You wouldn't say it from the share price, but this little company has been through the wringer over the past few years, first due to the rapid appreciation of the A$ (essentially, +90% of its sales are denominated in currencies other than the A$), and also due to an acceleration in the decline in demand of a product which five years ago made up almost half of SDI group sales, but which today is just one-quarter.
I think that, if one subjected most companies to that sort of ugly macroeconomic scenario, the outworking on their financial performance would have been severe, if not disastrous.
But - while it might not feel like it to some - I think SDI has performed very well under those circumstances:
Sure, EBITDA is today materially lower, running somewhere between $10m and $11m, down, down from FY2015's $12.3m and FY2016's record $15.5m (when the A$ averaged ~0.70).
But that level of EBITDA is still the highest on record (excluding FY2015 and FY2016), so its not as if the company has been driven to a point of financial duress; far from it.
It is still eminently profitable today, and in the best financial health it has ever been, despite some very material headwinds.
To demonstrate that assertion, it is worthwhile to take a look at what has been happening, not only to the P&L, but also to the other financial statements over this challenging period.
Starting with Operating Cash Flows and Free Cash Flows (in brackets):
FY2014 = $7.6m ($2.6m)
FY2015 = $7.3m ($2.7m)
FY2016 = $8.8m ($4.3m)
FY2017 = $9.4m ($3.8m)
2018 = $5.7m ($3.7m) (Half-year figures, only)
(Note: Free Cash Flow calculation includes acquisition of intangibles)
As can be seen, the cash flow performance has not skipped a beat in recent years, despite the earnings pressure.
In fact, the cash flow generated in the last half-year was almost double the level of the previous DH record, for both OCF and FCF
And remember, the December half is the seasonally weaker half, and speaking to management yesterday after the result, the indications were that the current half would still have its usual seasonal strength, meaning that OCF and FCF this year would be at near a near-record.
As a measure of how well the company's capital is being managed in the face of tough market conditions, this cash flow performance - not just year-to-date in FY2018, but over the past several years - speaks volumes, I think.
The outworking of this is that the dividend payout ratio was able to be lifted substantially, and the dividend has been growing at an impressive rate:
FY2014 = 0.7cps
FY2015 = 1.4cps
FY2016 = 2.0cps
FY2017 = 2.3cps
2018 = 1.1cps (interim dividend, up 10% on pcp)
This provides a good segue into what has been happening to the balance sheet, which shows that this generous increase of dividends to shareholders is not being funded by debt, because - impressively - the company's debt situation has been improving in somewhat spectacular fashion at the same time:
Net Debt at Period Ending:
FY2011 = $10.9
FY2012 = $8.0m
FY2013 = $6.4m
FY2014 = $4.7m
FY2015 = $2.1m
FY2016 = -$0.3m (Net cash)
FY2017 = -$1.6m (Net Cash)
DH2017 = -$3.7m (Net Cash)
There can be little doubting, I think, in that being an excellent outcome for shareholders, considering the circumstances.
The next step, I think, will be the board giving consideration of accelerating the return of the company's excess capital to shareholders over the next 12 months, certainly by continuing to increase the dividend payout ratio, but also in the form of special dividends, I strongly suspect. (The company has around $4m in franking credits, I estimate.)
In closing:
Sometimes I think the market gets so deeply caught up in the minutiae of individual profit results, that it risks losing perspective of the context in which those results come about.
As a shareholder, I think it is more important to evaluate the strategy of the people that are managing one's company, and whether they are acting with prudence and discipline, than it is to worry about external developments that can impact the share price in the short-term.
In SDI's case, the company has been dealt a few harsh blows by some extraneous events that are difficult to predict, and impossible to control.
But when one takes a dispassionate step back and one makes an assessment in the broader scheme of things, the numbers say that the companies managers - i.e., the stewards of shareholder capital - are doing a good job and are earning their keep.
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