Something about which investors in SDI need to be aware in the...

Something about which investors in SDI need to be aware in the upcoming result is a material accounting item that appeared the previous corresponding period, which needs to be isolated for purposes of making of like-for-like comparisons in regards to the DH2019 vs DH2018.

Specifically, the reported DH2018 result had Profit Before Tax (PBT)  (let's talk PBT to avoid tax distortions) of $4.45m.

At face value, this appeared to be a very strong result, being a Dec. half record, and almost triple (up 189%) on DH2017's result.

Trouble is, that DH2018 result was boosted, quite significantly, by a $0.67m (i.e., an 18% boost) unrealised foreign exchange gain which arose due to the weakened Australian dollar during that DH2018 period.   

Being a company with 90% of Revenues being sourced offshore, and therefore supported to a large degree by non-A$ denominated assets and to a lesser extent, liabilities, SDI's financial results are always impacted by exchange rate fluctuations in a manner that has more to do with an accounting oddity and less to do with the true underlying operating performance of the company.

Specifically, compared to its underlying performance, SDI's financial results are overstated after the A$ has weakened meaningfully, and understated when the A$ has undergone a bout of strengthening.

However, as can be seen from the chart below, in recent periods, the impact has been more pronounced than normal, with the DH2016. JH2017 and DH2017 results adversely impacted (by a significant 20%, In DH2017), as the A$ underwent a bout of strengthening against SDI's main trade currencies, the US$, GPB, the euro and the Brazilian real:  



And then, when the A$ weakened again over the course of calendar 2018, it resulted in the DH2018 reported result being 18% higher than would otherwise have been the case, due to the one-off forex gains.


Point being made is that, ceteris paribus, DH2018's "clean" PBT figure was closer to $3.78m (Reported PBT of $4.45m less foreign exchange gain of $0.67m), and it is this adjusted figure that should be used for comparison purposes for the upcoming result.

(Note: the upcoming result might also include further modest forex gains, given that the A$ @ 31 December 2019 was weaker than both the US$ as well as the GBP were compared to 30 June 2019, and was largely unchanged against the Euro.  But it was stronger against the Brazilian real.   So, to the extent that forex gains are booked, needless to say these would need to be stripped out for purposes of comparing with the pcp's "clean" PBT of $3.78m.)

For what it's worth, I think that a PBT figure for DH2019 anywhere above $4.0m would be acceptable, and anything north of $4.5m would be a very good result given that the pcp was still a near-record result, even if the large forex gain in that period is ignored (and, bearing in mind that December half-years are seasonally weak for SDI, so timing of specific shipments around 31 Dec can meaningfully boost, or retard, Dec half results).

So, the point of this post is to say that it is worth bearing in mind, to the extent that the market is deficient or has forgotten about what drove the DH2018 reported PBT figure of $4.45m, that there might be a degree of sticker shock on the day of the result if the DY2019 result comes in at "only" between $4.0m and $4.5m which might, to the uninitiated eye, look "weak" compared to the pcp figure.

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