SDI Group (SDI.L AIM All Share, Market Cap £201m, 194p, 4.5% of JIC Portfolio, (Medium Risk/Medium Reward, target position 5.0%) www.sdigroup.com
SDI designs and manufactures scientific and technology products for digital imaging, sensing, and control applications, including life sciences, healthcare, astronomy, manufacturing, precision optics, and art conservation. SDI operates through its company divisions: Atik Cameras, Synoptics, Graticules Optics, Sentek, Astles Control Systems, Applied Thermal Control, MPB Industries, Chell Instruments, Monmouth Scientific, Uniform Engineering, Scientific Vacuum Systems, Safelab Systems and LTE Scientific.
SDI continues to grow by developing its own technology advancements, improving its global sales channels, and pursuing strategic, complementary acquisitions.
The "Target for Review" price was exceeded.
On 7th December, on SDI’s H1 results, I concluded:
“I do not doubt there will be further acquisitions in the next six months, which should further enhance shareholder value. It has a track record of not overpaying and successfully assimilating acquisitions into the group. On current forecasts, the shares are valued at 17.9x April 2023 earnings per share. Further acquisitions should bring that rating down, although conditions are getting tougher. I have a Medium Risk/High Reward rating which I am happy with. At my Review target of 193p, which it spiked up to in August, it would be at 20.0x current forecasts, which, without earnings-enhancing acquisitions, looks tops to me. Happy Holder!”
In my Thumbnail, published on 26th January, I was a little more enthusiastic than the 7th of December conclusion. That was at 166p.
The closing price for SDI Group last night was 194p, just above my target review price of 193p. To begin my review, I originally set the target price based on a valuation of 20.0x earnings estimates for the year ending April 2024. However, SDI Group's earnings estimate of 9.45p for April 2024 may be inaccurate. Future acquisitions could enhance earnings and potentially lower the valuation. If earnings-enhancing acquisitions increase the estimate by, say, ten per cent to 10.5p, a 20.0x valuation would translate to a share price of 210p, close to its previous all-time high.
This Stockopedia chart illustrates the development of earnings estimates for April 2023 year-end over the past year.
In January 2022, earnings estimates for the current year ending April 2023 were at 6.45p per share. Due to acquisitions and strong trading, the estimates rose by 44 per cent to 9.3p. In October of last year, when Fraser Anti-Static was acquired, I noted that Finncap's price target of 275p was achievable but required a significant shift in the underlying stock market mood to a bullish state; at 275p, it would be on a PE ratio of 29.3x. Keeping the PE ratio at approximately 20.0x would require a further 40 per cent increase in earnings estimates. I guess it’s possible, especially as the market has started 2023 in a more bullish mood.
While I'm tempted to trim my holding, I believe it's better to wait and observe. Another deal may occur in the next few months, which could keep the share price momentum going. I think my position in the stock, at 4.4 per cent (below my target of 5.0 per cent), is reasonable considering the risk involved. If it were 6.0 per cent or higher, I would consider trimming and locking in profits.
Conclusion: My "Target for Review" price increased to 210p
As always, if I find another investment with a more appealing valuation, I reserve the right to sell some shares before it reaches my review price target.
