For a series of reasons - some political, some cultural, some natural evolution of economic systems - the Australian manufacturing sector has become significantly hollowed out over the past decade.
Besides the above, one of the most significant reasons that rendered a lot of Australian manufacturing obsolete was the long period of strength in the Australian dollar, between 2009 and around 2015, when it was above 0.90 against the US dollar, including a 30-month period when it was above parity.
To compound matters, between 2006 and 2011 period, the silver price went from $6/oz to over US$40/oz at a time when more than 80% of SDI's sales were amalgam products, for which silver is an input.
SDI, being a small, exposed manufacturer which exports 90% of its products, faced a significant margin squeeze, with EBIT margins dropping to all-time lows of 4%, in FY2011, which was when the A$ and the silver price peaked.
At the same time the company was burdened with over $10m in Net Debt which it had to service.
That the company remained profitable during this very difficult and challenging period, and got through it without turning to shareholders for capital, is worthy of remark and is something of a comment on the durability of the business, I think. And on the doggedness of its management and employees.
As the following charts show, the relative strength of the A$ is a very important determinant of SDI's financial performance.
Investors tend to have short memories and are prone to forgetting that the A$ spent a great deal of its floating life at levels significantly lower than those of the past decade, which was a very unique period.
In the years preceding the commodity boom, the Australian dollar averaged less than 0.60 against the US dollar.
During that sub-0.60 period, SDI's operating margins were in the high teens and peaking well above 20%, and Return on Equity also routinely hit 20%:
View attachment 2052724The impact of the afore-discussed strength in the A$, both in magnitude and duration, on SDI's EBIT margin and ROE in the period between 2007 and 2013 can be very clearly seen.
The easing of the A$, back to an average of around 0.75, over the FY2014 to FY2018, period saw SDI's financial metrics improve to reach double digit ROE's again (earnings once again exceeding cost of capital) and last year, with the A$ averaging around 0.72, the ROE [*] was at a level last seen decade-and-a-half ago (in FY2004).
[Fun fact: In 2004, SDI reported NPAT of $8.0m and the share price (same amount of shares on issue as today) averaged $1.70 during that financial year, and peaked at $2.40.
Oh, and the company has $10m of Net Debt at the end of that period, whereas today it has Net Cash of some $7m.
(Just saying....)]
With the A$ having lurched meaningfully lower since 30 June 2019, to be currently at a 15-year low of 0.62, this year SDI's ROE will be somewhere around 14%-15% (and closer to the higher end of that range if the currency remains at current levels).
Now I have no means of forecasting what exchange rates are going to do, assuming the current exchange rate prevails, it would mean that SDI's ROE would be at least 15%.
And 15% ROE on a $75m Equity Base (or $68m after stripping out the cash, for analytical consistency) means NPAT in excess of $10m (corresponding to Pre-Tax Profit of $14.5m, which is the same as EBIT given the company's interest expense line is zero).
So we've got a $94m Market Cap ($87m EV) business generating around $14.5m in EBIT (and ~$19m in EBITDA given $4.4m in D&A)
That translates into an
EV/EBITDA multiple of 4.6x and an E
V/EBIT multiple of less than 6x.Of course, we have the next few weeks/months to contend with but, as far as I know people still get toothache no matter what viruses are prevalent they still need those cavities to be filled. However, it would be naive to think that the growth in sales of whitening products might slow a tad.
But it is still a real likelihood that this half will be close to a June-half earnings record which, combined with the record December-half profit result for DH2019, means that FY2020 will be a record year for SDI.
And, assuming dentists can still get hold of masks in the future, I strongly suspect that FY2021 will be another record result, unless the A$ undergoes some kind of miraculous resurgence from current levels.
Australian manufacturers have been whacked hard over the past decade.
Those that have survived, like SDI, are now likely to be enjoying their time in the sun.
[*] Adjusted for net cash to make comparisons with history more meaningful given the company has historically been significantly geared, whereas today it is sitting on net cash.
