SDI Group (SDI.L AIM All Share, Market Cap £152m, 148p, 2.3% of JIC Portfolio, (Medium Risk/Medium Reward, target position 2.5%)
SDI Group is a United Kingdom-based company. It designs and manufactures scientific and technology products for use in digital imaging and sensing and control applications including life sciences, healthcare, astronomy, manufacturing, precision optics and art conservation. It employs a “buy and build” strategy – adding shareholder value through sensibly priced acquisitions in complementary areas.
Results for the year ended 30th April 2022
Conclusion: This is the first we have heard from SDI since the 6th May year-end update. An excellent set of results. It’s good to see profits come in a little above May’s first stab. Even more, it is good to see upgrades to forecasts for the current year ending 30th April 2023 of around 5.0%. One thing we do know is that these forecasts will be wrong. It will make further acquisitions which should enhance earnings. Against that, there is a risk of a slowdown due to economic headwinds. As things stand, the shares are valued at a prospective PE ratio of around 17.5x. That is the lowest valuation for some years and is now a much more attractive proposition following the 30% fall in the share price since last November. The shares will bounce nicely this morning (I should have added yesterday), and although I want to rebuild my position, I won’t be chasing today. Patience normally pays off. Happy Holder!
· Revenue increased by 41.6% to £49.7m (2021: £35.1m) including 21.6% organic growth
· Adjusted operating profit* increased by 57.1% to £12.1m (2021: £7.7m)
o Reported operating profit increased 72.9% to £10.2m (2021: £5.9m)
· Adjusted profit before tax* increased by 59.5% to £11.8m (2021: £7.4m)
o Reported profit before tax increased 76.8% to £9.9m (2021: £5.6m)
· Adjusted Diluted EPS* increased by 45.9% to 8.71p (2021: 5.97p)
o Reported diluted EPS increased 57.6% to 7.23p (2021: 4.58p)
· Two new acquisitions added to the Group - Scientific Vacuum Systems Ltd and Safelab Systems Limited
· Companies across the Group coped well with challenging supply chain issues and inflation
Ken Ford, Chairman of SDI said:
"Over the last seven years, since the Group's buy and build strategy gathered pace, the Group has grown its turnover from £8.4m to £49.7m and its reported profit before tax from £0.5m to £9.9m, through the excellent execution of a proven value-creating business model. While increasing shareholder returns consistently and substantially, we have also built capacity and capability to enable future growth.
The key growth drivers within our business remain organic growth and growth through acquisition. The Group is in a very strong financial position and has the resources and flexibility to support these key drivers. While mindful of the potential for further macro-economic turbulence and despite a challenging external environment, FY2023 has begun well. In addition to reporting today FY2022 profits that are ahead of recently upgraded market expectations, I am pleased to report that the Group now expects to deliver FY2023 adjusted profit before tax* of not less than £11.0m, also being ahead of recently upgraded market expectations."
The remainder of the results statement reads well and gives a clear explanation as to why the strategy is working
Chief Executive's Operating Report for the year ended 30 April 2022
Our financial year from May 2021 to April 2022 coincided with the second year of the COVID-19 pandemic, under which most restrictions to normal life and work were lifted in the UK (with limited and temporary restrictions put back in place for the milder Omicron wave), and from February 2022 the start of the Ukraine conflict (which has had limited impact on the Group).
In the previous year (2020-21), while all of our businesses had remained in production throughout, with some exceptions where their customers reduced their purchases, and all businesses had to cope with uncertainty, logistics challenges, employee safety and well-being concerns, and travel restrictions. The exceptional cases, notably at our MPB and Atik Camera businesses, and at Monmouth Scientific (acquired in December 2020), had additionally the welcome challenge of significantly increased demand for products related to the diagnosis and treatment of COVID-19.
This financial year (2021-22) was thus characterised by a substantial progression towards normality, although certainly tempered by persistent travel restrictions (especially outside of Europe), trade fair cancellations, face-to-face customer access difficulties and ongoing supply chain challenges, with difficulties in accessing some components at any cost and large price increases demanded for others in short supply. Customers resumed buying, and while the exceptional demand at MPB and Monmouth Scientific was no longer there, demand for cameras supplied into the PCR testing market remained high.
Against this background, I am pleased to report that our very flexible structure and the dedication of our staff across the Group have allowed us to maintain our growth rate, already strong in 2020-21 and previously, and we are reporting again record financial results.
Revenues and profit
Overall revenues grew by 41.6%, of which 21.6% was organic growth and 20.0% was from the full year impact of the 2020-21 acquisitions of Monmouth Scientific and Uniform Engineering and from the contributions of Scientific Vacuum Systems and Safelab acquired in the year. Adjusted Operating Profit grew by 57.1%, mainly resulting from the organic sales growth.
SDI's digital imaging segment delivered 36.1% organic sales growth, with revenues at £21.5m and Adjusted Operating Profit at £8.5m, up 64.4%. At Atik Cameras, sales of cameras for PCR machines, previously expected to be essentially one-off due to COVID-19 demand, increased further, and in fact they are now expected to continue at least for the first half of 2022-23. At the same time, demand from our other camera customers has been recovering over the course of the year. Graticules Optics also achieved record sales, while sales at Synoptics were flat overall but 3% higher than in 2019-20.
The sensors and control segment grew sales by 46.0%, to £28.2m. Organic growth was 9.7%, and the remaining 36.3% growth was from the acquisitions of last year and this year. Adjusted Operating Profit grew 19.4% to £5.2m. Astles Control Systems grew substantially over the previous year, with a partial recovery of its global service revenue and very strong sales of equipment into new aluminium can production lines (linked to a slow transition away from plastic bottles). Sales of scientific and industrial chillers at ATC and of chemical sensors at Sentek saw good growth (last year they were flat on the previous year). MPB sales were slightly lower, without the benefit of sales of flowmeters for medical ventilators but were 13% higher than in 2019-20. Sales at Chell Instruments were also lower than in 2020-21 when they benefited from a large equipment order received pre-pandemic. The level of sales at Monmouth Scientific, acquired in December 2020, continued at a high level, although the mix in demand has shifted away from standard biological safety cabinets (used to ensure operator safety and reduce contamination in COVID-19 test equipment) towards a more normal mix of custom/modular fume cupboards, laminar flow cabinets and cleanrooms. Both Scientific Vacuum Systems (acquired in January 2022) and Safelab Systems (acquired in March 2022) delivered revenues and profits which were consistent with our modelling at the time of their acquisitions.
Basic earnings per share increased by 56.7% from 4.81p to 7.53p; fully diluted earnings per share also improved by 57.6% to 7.23p (2021: 4.58p).
The UK is a centre of excellence for product innovation and manufacturing with many world-leading businesses operating in life science and technology niches. As a buy and build group, finding those businesses with niche capabilities is key to our success. The SDI Group has a reputation as a supportive owner that invests to improve staff expertise and facilities, as well as trusting subsidiary management teams with their day-to-day operations. This approach has allowed companies in our group to upgrade capacity, efficiency and safety in their manufacturing facilities and their businesses to thrive.
This year we have focused much attention on embedding last year's acquired businesses into the Group, and we have acquired two additional high-quality and profitable UK-based businesses, extending our technology and customer base and providing further scope for future organic growth.
On 5 January 2022, the Group acquired 100% of the share capital of Scientific Vacuum Systems Limited ("SVS"), for total consideration estimated at £5.5m, of which £4.5m has been paid in cash and the remaining £1.0m is contingent on SVS achieving expected profit for the year to 30 September 2022. On the date of the acquisition, SVS had £1.25m of cash in hand. SVS specialises in custom Physical Vapour Deposition (PVD) systems for the deposition of thin film coatings typically on semiconductor wafers, for use in scientific research, industrial and semiconductor manufacturing applications, and is the market leader in the manufacture of production sputter coaters for premium brand razor blade coating. SVS brings considerable technology and engineering expertise to the Group in high vacuum and PVD applications, as well as blue chip customers, and may be a springboard for future acquisitions. SVS is based in Finchampstead, Berkshire.
On 24 March 2022, the Group acquired 100% of the share capital of Safelab Systems Limited ("Safelab") for £8.5m (including £0.2m in SDI Group shares, £5.9m in cash paid before the year end and £2.4m in cash paid after the year end). On the date of the acquisition, Safelab had £0.8m of cash in hand. The company owns its main manufacturing building valued at £1.4m. Safelab produces high specification fume cupboards and similar cabinets, for both commercial and research laboratories and with a special focus on the education sector which requires versatile and fully featured ducted cabinets often specified in newly built or refurbished laboratory facilities. Safelab is based in Weston-Super-Mare. The acquisition follows the Group's December 2020 acquisition of Monmouth Scientific which manufactures clean rooms, fume cabinets and safety cabinets and is based in Bridgwater. The Group will maintain the identity and autonomy of both companies in their current locations, but the businesses are actively seeking and finding areas of co-operation to reduce costs and enhance their total customer offer. Our Uniform Engineering business is a supplier of sheet metal fabrications to both Monmouth Scientific and to Safelab.
We have funded the cash elements paid for both acquisitions from our existing cash resources and from our revolving credit facility with HSBC UK Bank. The acquired companies contributed £1.7m of revenues to the Group this year and as expected, both acquisitions have been earnings enhancing to the Group in 2021-22 immediately following initial acquisition-related costs.
We have now learnt to live with the pandemic, and although enhanced safety measures are still in place and some staff work some of their days from home, our focus across the Group is very much on working closely together and with our customers to build for the future.
In common with manufacturing industry across the world, and perhaps especially in the UK following Brexit, the pandemic is causing supply chain issues to all of our businesses, and a tight labour market is further forcing cost increases which have recently been compounded by the impact of Russia's invasion of Ukraine. We have been delighted with the response from our businesses' management and staff who have worked tirelessly to find solutions to component shortages, and the results can be seen in our record levels of sales and profit. We now look forward to an expansion of new product launch activity, by our customers and by our own businesses, and we believe this brings the Group new opportunities to gain market share following a period in which the focus has been on supplying existing products.
Our rolling programme of upgrading manufacturing facilities across the Group continued with the completion in March of the consolidation of Monmouth Scientific's production and administration activities from several buildings to a single purpose-built site in Bridgwater, the start of a substantial refurbishment of the Graticules Optics factory in Tonbridge, and the doubling of engineering and manufacturing space at Astles Control Systems in Princes Risborough. Such investments typically have a very good payback, as they are justified by the capacity increase but bring many other benefits including efficiency, staff comfort, product quality and image.
While face-to-face sales activity, including trade fairs and exhibitions, remained difficult (although it has picked up substantially in the last couple of months), we have continued to make good progress with website enhancement, on-line sales, virtual selling techniques and social media activity, and we have been able to leverage our capability across the Group.
During the 2020-21 year at Atik Cameras, we strengthened the management team at both company sites, near Norwich for overall business management, sales and marketing and research and development, and near Lisbon, Portugal, for manufacturing, logistics, account management and finance. During the 2021-22 year, we have further developed the organisation so that all invoicing to customers is now direct from our Portuguese operation and the UK organisation provides management, sales and marketing and R&D services to Portugal. This has been very well received by customers.
When acquiring businesses, it is imperative for us that they have a strong management team usually led by the founder of the business. This year two of our managing directors decided to step down but I am pleased to say, still continue in consultancy roles. Steve Chambers, one of the founders of Atik Cameras, stepped down at the beginning of April 2022. He was replaced by Panos Kapetanopoulos, who was the R&D director. David Pomeroy decided to step down in December 2021 at Monmouth Scientific and was replaced by Alan Holcombe, who also remains Managing Director at Uniform Engineering. I wish Panos and Alan well in their new roles and am certain they can be successful with the support of the SDI directors and their fellow subsidiary directors.
Cash and Liquidity
SDI has a strong balance sheet with current year-end gross cash at more than £5.1m, and £16.0m of undrawn bank facility, which remains available (unless extended) until November 2024. The Group therefore has sufficient funds that can be used, with its steady cash flow, to acquire new companies and invest in our current portfolio of profitable businesses.
Our businesses remain busy, and several are operating at full capacity with their current staffing. Finding good staff and circumventing supply chain issues are now part of daily business, and our managers have demonstrated their ability to solve these challenges and more.
We have budgeted for organic growth, and, although mindful of a possible consumer-led recession and levels of inflation that have been absent for many years, we have had a good start to the 2022-23 financial year and are confident that we can continue to trade profitably over the coming months.
The market for acquisitions appears buoyant, and SDI expects to acquire additional businesses in the 2022-23 financial year.