One of the problems with this stock - and it is the reason that...

One of the problems with this stock - and it is the reason that it has to date not been afforded anything other than discount-to-broader market valuation multiples - is that its financial results every six months over the past 6 or 7 years have been heavily distorted by factors that are extraneous to the operations of the business:

First there's the increasing 1H-2H seasonality.

Then there's the significant impact of exchange rate movements.

Then there's the fact that it has been a company with two product streams of diametrically opposite fortunes - one going semi-obsolete (amalgam) while the other growing rapidly (aesthetics and whitening).

Then, just when the business was about to get onto an even keel with respect to fast growing products dominating the sales line, Covid struck and the underlying growth rate was once again masked (intentional play on word there).

All of these factors have conspired to make it difficult in recent years to accurately discern the true shareholder value creation potential of the business under steady state conditions.

So what I try to do when faced with situations like this - when financial performance gets whip-lashed by short-term factors outside of the control of company management - is a I look at the degree of Shareholder Value Add (SVA) over a reasonable time frame - spanning at least a few years.

(And I assess at it on a per share basis in order to provide context against the prevailing share price).


In order to monitor the main contributors to, or detractors from, SVA over time, I break down the year-on-year changes in Net Assets into three broad categories, namely:

1. Net Current Assets (i.e., Current Assets Less Total Liabilities),
2. PP&E, and
3. Intangible Assets

Then, of course, we need to add annual dividends received.


The annual SVA per share contributions from each of these is represented in the following chart:




A few observations from that chart are worthy of discussing:

1. Total SVA has only been negative once over the past twenty years (which is as far back as I went with this exercise), and that was only by a tiny amount of -0.4 cps in FY2011, which was when the A$ hit 1.10 against the US$ and the silver price surged from $15 /oz to almost $50/oz in the space of 18 months (silver was a key raw material input into SDI's then large amalgam business). So a perfect storm for SDI. And that shareholder value only went backwards by a small degree is something of a statement of the quality of the business franchise, I think.

2. Even in FY2020 and DH2020 - during which Covid effectively shut down the bulk of SDI's international business - SVA was still 1.5cps for FY2020 and 6.0cps for DH2020. (Note: All government support payments have been excluded from this exercise.). That's quite some outcome, on any objective measure.

3. There are 3 distinct phases in SDI's corporate evolution over the past 20 years:

Period A - "OLD" SDI: Early 2000s
When the company was an almost pure amalgam manufacturer.
Sales growth was strong and SVA was high over this period, averaging between 4cps pa and 5cps pa.

Period B - "TRANSITIONING" SDI: 2005 to 2012.
During this period, amalgam sales had matured and had started to decline, prompting the company to pivot to developing with composite products. The transition took 3 or 4 years, which was disruptive to the business. This was compounded by the commodity boom which occurred from around 2008 and had the effect of boosting the value of the A$ (along with the silver price) which, as discussed earlier, depressed the rate of SVA.
It averaged less than 2c pa over this period.

Period C - "NEW" SDI: 2013 and beyond.
With the commodity boom ending, the previous headwinds of the strong A$ turned to tailwinds, and declining amalgam revenues were starting to be surpassed by new generation, fast-growing aesthetic composites and glass ionomer products. SVA has averaged 6cps pa since 2013, reaching as high as 8.6c. Of course, it must be noted that during the bulk of this period amalgam was still a material part of the sales mix (40% in FY2015 and 20% in FY2020). So even though SVA was high, it was still influenced by the amalgam drag.


Against that backdrop I think it is also useful to look at not just annual SVA, but at cumulative trends:



So part of the point of this exercise is to demonstrate that, while SDI's earnings tend to be quite volatile between one financial period to the next, the important thing is that the company is always creating shareholder value - sometimes at faster pace than others, but the measure is never negative - even during some extreme extraneous events (eg. global economic recession of 2001-2003, GFC, A$ exceeding parity with US$, surging raw materials prices, and even a global pandemic!)

And as can be seen, since 2013 aggregate SVA has been around 50c per share (80c total at the end of Dec 2020 less 30c @ end of FY2012). That's a very meaningful rate of shareholder value accretion, particularly in the context of the prevailing share price at the start of that period, which was somewhere around 12c per share!

And it bears remembering that that period coincided with sales of what was SDI's largest product at the start of that period - namely amalgam - falling by a massive ~60%.

That point cannot be overstated - that the business could still generate increasing SVA during a period where its biggest single product line contracted by 60% speaks massive volumes about the shareholder value creating power of the Aesthetics and Whitening products.


I expect that - had it not have been for Covid smashing the business - we would have witnessed the first real evidence of the turbo-charged SVA probably in the previous financial result, but almost certainly in the current result.

So this has been delayed by 18 months, unfortunately, but once there is real evidence of it, I very much doubt the market will still afford the stock valuation multiples of a mere 5.7x EV/EBITDA and 8.1x EV/EBIT.






Note: Included in the above is the SVA from the rising value of Intangible Assets.
Obviously, Intangible value is exactly that... not tangible.

Therefore, in the interests of conservatism, I also run the exercise ignoring Intangibles (i.e., this assumes that the investment in Intangibles is totally non- value accretive.)

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As can be seen, if the investment in Intangibles is ignored totally, there were a few negative SVA years, but they were all during that challenging Period B, during which the business was transitioning away from amalgam (made doubly painful by the impacts of the surging A$ and silver price).

But as the amalgam drag has eased over the past 5 or so years, the SVA profile of he company has lifted to a structurally higher level.

Once the storm of Covid has dissipated - which it is doing - and as amalgam becomes even less of a negative influence, the growth rate of the company overall will - mathematically - increasingly tend to the growth rate of the fastest growing products.

My call is that will result in a further step-up in Shareholder Value Add, to a level that the market will not be able to continue to ignore.


It's been quite a long slog for this little company, and it has been buffered about by external factors and has been particularly unlucky that Covid struck when it did, because I think FY2020 and FY2021 were setting themselves up to be very good years.

These SVA numbers make it difficult for me to find any major fault with the long-term growth strategy and I am increasingly convinced as time passes that the Aesthetics and Whitening business is powerfully shareholder value creating, and that true extent of this has been masked by some of the factors discussed herein.

I've been a shareholder for around 9 years and I feel more excited about my investment in the company today than I did when I bought my first shares... despite the share price being a lot higher today.

Back then I bought into the potential concept of a post-amalgam world for SDI.

Today that concept has been proven up; but the market has just not recognised it.

Here endeth the gushing.

...