Ann: Preliminary Final Report, page-8

@ambo005,

Sure, prima facie SDI looks cheap, not only compared to other stocks in the healthcare sector, but in absolute terms, too.

However, it has always looked cheap (albeit not as cheap as it has been over the past 12 months) and it will probably remain cheap for some time, for a number of reasons in my opinion (in decreasing order of relevance):

1. Project risk and associated gearing: The company is undertaking a once-in-a-generation expansion program, which essentially involves developing a greenfield manufacturing operation, for a substantial sum - equivalent to half the market value of the company, with the intention at this stage to for the project to be funded internally.

2. FY2025 is cycling an extraordinarily strong FY2024 (Looking at Pre-Tax Profit, DH24 was 47% up on its pcp, and JH24 was 66% higher), as can be seen by the outlaying dark grey column:

For what it's worth, I expect some normalisation in FY2025, to PBT somewhere between $12m and $14m, so around 20% contraction. While this would still be a strong result in the context of the company's history, we know the market has the attention span of a gnat, and will see only the negative variance, without contextualising the abnormally high base.

And we know how the market responds any time it sees a negative delta. I expect there will be some sticker shock on the day the market sees the result (or gets the update at the AGM).

3. It might be considered to operate in the "health care" sector, but in essence, the business model is really "R&D + Manufacturing". Yes, the widgets SDI designs and makes happen to go into some part of the human anatomy, but it is not of a pharmacological or clinical nature. It might be a contentious opinion, but many ways I think that ANN is a better analogue for SDI than a pathology business or a life sciences company, such as a biopharmaceutical developer. At best, SDI can be classified as "Health Care Lite", in my view.

4. Lack of fractionalisation of CoDB. I have been a shareholder in SDI for around 12 years and over that time, the SDI's Revenue has more than doubled, reflecting a >6%pa CAGR. And it has done so without any recourse to shareholders for funds and without any acquisitions, so purely organic growth. However, the one brickbat I will throw against the company is that, despite that impressive growth in Revenue, it has not been able to fractionalise fixed overheads, with CoDB-to-Sales having fallen only marginally over time:

I suspect that some of the reason for this is that scale benefits were lost because the factory had already been space-constrained


5. SDI is effectively a private company, which happens to have a place where its shares can be traded. Make no mistake, what happens to SDI strategically is at the beckon and behest of the founding family. For long-term shareholders, who have observed the members of the founder family over an extended period, and concluded that they are trustworthy and spend the company's capital conservatively and prudently, being a minority SDI shareholder is not a problem. But it is likely to be a consideration for the newcomer to the stock, which informs the multiple the marginal buyer is prepared to pay.