For what it's worth, this Revenue and Profit guidance comes in...

For what it's worth, this Revenue and Profit guidance comes in well above my expectations (and I'll wager above the expectations for most followers of the company).  

[SDI management appear to have learnt the art of "Under-Promise and Over-Deliver".]


The problem is that this update - given the distortions caused by Covid during the first-half, and continuing into the second-half - is not at all meaningful as a base off which to value SDI.  (Ditto for the FY2020 result, in which the second-half was the worst second half result since as far back as I have maintained records - which is around 20 years.)

So to arrive at earnings figures off which to derive a valuation, one needs to largely ignore FY2020 and FY2021 numbers and to resort to first-principles estimating of Revenue & Operating Margin for FY2022, which - at this stage - could be expected to be a normalised year, a relatively free of Covid distortions.


Starting with Revenue:   

FY2021 Revenue - still Covid-impacted -  is expected to come in at ~$79.5m.

Applying the 6.0% to 6.5% top line constant currency growth rate which SDI has achieved over the 5 or 6 years preceding Covid, yields a FY2022 Revenue expectation of $84m/$85m

As can be seen, this level is not inconsistent with the rising pattern of Revenue (excluding the Covid-induced disruptions of FY2020 and FY2021... denoted by the light-shaded columns):




Now to Operating (EBIT) Margin:

The relative strength of the A$ is clearly a strong determinant of SDI's Operating Margin.

When the A$:US$ rate was at around 0.60 (during the global economic slowdown of the early 2000s), SDI's EBIT margin was in the high-teens, even exceeding 20%); when the exchange rate got close to parity (during the commodity boom between 2008 and 2012), EBIT margins got crunched as low a single-digit levels.




Over the five or so years immediately preceding the Covid years, EBIT Margins varied between 11.6% and 15.1%.   Against that backdrop, for FY2022 I assume what I think is an reasonable 13% EBIT Margin.


Which results in FY2022 EBIT of $85m x 13% = $11m





Now to valuation:   

SDI's Market Cap is currently $99m.

The company exited DH2020 with some $11m in Net Cash.

Now that reflected a significant improvement on the $4.7m figure at the 30 June 2020 balance date, but that was an outworking of capital conservation measures in DH2020 in the form of significantly reduced dividend ($1.0m lower), liberation of some $2m in working capital, and $2.4m in Receipts related to Jobkeeper payments.

So there will have to be an investment made back into working capital going forward, as sales continue to rebound, and the dividend is sure to be raised again to the get back on trend with the progressive dividend path that was in place prior to Covid hitting.

So my sense is that, while the business will generate a cumulative $24m or $25m in EBITDA over the three half-years of JH2021, DH2021 and JH2022, only maybe $20m of that will convert to Net Receipts over that period.

Tax will consume $5m, and the company will spend some $7.0m on purchasing of PP&E and Intangibles.

Dividends are expected to cost $5.5m, based on 50% Payout Ratio over the foreseeable future.

So that would result in Net Cash by the end of FY2022 as follows:

DH2020 Net Cash = $11m

Add:
Total Net Receipts = $20m

Less:
Tax = $5m
Investing Cash Flows =  $7m
Dividends = $5.5m

So projected Net Cash @ end of FY2022 = $13.5m, say $13m


=> EV = Mkt Cap of $99m less Net Cash of $13m = $86m

Therefore, a prospective FY2022 EV/EBIT ($86m divided by $11m) = 7.8x

With D&A running at around $4.6m to $4.8mpa, that implies EBITDA of around $15.5m, or prospective EV/EBITDA of a mere 86 /15.5 = 5.5x.



For a business of this nature - with its significant dental materials IP, long operating and financial track record, mid-teen ROE (despite as much 15% of shareholder equity being represented by Net Cash), high, single digit top-line growth rate, and high degree of founder-ownership -  I reckon that the following sorts of EV multiples are not at all undemanding:

EV/EBIT of 12x, which correspond to EV/EBITDA of ~8.5x.

Based on the rough financial forecasts made above, that suggests a target price of around $1.20 to $1.25.


SDI has come a very long way over the past decade, having completely and successfully transformed its business away from becoming-obsolete amalgam fillings, to rapidly growing composite material.

Had it not have been for Covid delaying that point of re-rating, the evidence of this metamorphosis would have become abundantly clear by now, which I am convinced would have brought about the long-awaited re-rating of the stock from its perennial significantly discounted multiple.  

With the company now emerging - not just unscathed, but actually  in jolly fine financial fettle - out of the shackles of Covid, my expectation is that the re-rating will resume over coming 6 to 9 months.

Accordingly,  I added to my holdings today.

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