Thursday, April 21, 2011

Meeting # 35 SDI Valuation


This meeting is due to occur in the future in May 2011 (see calendar above for exact date).

SDI is a company that operates in the research and development, manufacturing and marketing of dental restorative materials. SDI’s products include alloys, etchants, glass ionomers, sealants, cement, equipment, tooth whitening, composites. It operates in Australia, Europe, the United States and Brazil. The Company’s subsidiaries include SDI (North America), Inc, SDI Holdings Pty Ltd, Southern Dental Industries GmbH, SDI Brasil Industria e Comercio Ltda and SDI Dental Limited.

The share price has taken a hammering recently with the high price of silver and high Aussie dollar. At this time of wring the share price is 17 cents.

Discussion points prior to the meeting
In the last valuation we found some descepencies with what comsec claimed the debt levels were against what was in the annual report. For this valuation I did some cross verification and was supprised to see the cash in the annual report to be 875,000 but in comsec it was 3,406,000.

ThenI realized that the 3406 is for the consolidated entity not the company (we'll need to discuss this)


The Meeting
Attendees Paul, Mark, Justin, Tom and analysis was sent from Roy in the UK

Findings
As a value investment it was not good and the inconsistent earnings have made it a difficult company to value. Return on capital is also not good.

Click Here for our Valuations

4 comments:

  1. Hi Roy

    I have looked at your Valuation and am a bit confused. You have valued it at 27 cents a share it is currently 17 but your conclusions is that it is not a buy? Could you put a text summary at the top just explaining your logic? I think it might make things clearer - I did it on my ARB valuation which can be viewed online

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  2. Mark – checked out SDI.
    Seems like a really good deal.
    The main point I took out of reading their reports were:
    - Highly reliant on Silver (50% of products/revenue)
    - I wonder how well they will be able to pass on the cost, seems
    like they were struggling with this point but hard to tell.
    - Will high silver prices mean that non-silver products will
    dominate the market, if so will they will be able to response.
    - Obviously the AUS dollar is smashing them around a bit.
    Is investing in SDI taking a position that the AUD and silver prices
    will eventually come down and SDI stock go up?

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  3. [email from Mark]
    added my val with some crowded notes as a comment. Roy has done his homework and decided no due to the volatility of earnings by the look. I'm actually happy at the current price to buy some - but already have some:

    My notes (in case you are interested)

    SDI
    Seems cheap to me – however their guidance is for between $1 to 2m NPAT – at 1.5m and market cap of $21m – this is about 14x – which is a slightly high PE ratio for this co looking at one year only.
    Using my model I think the SP should be about 23 cents as a minimum entry price. This is at 6 times adjusted earnings, and adjusted for an average liabilities ratio at about 40 to 50%.
    At an AUD of about $1 US, and record silver prices, this company is still profitable. If the AUD and Silver prices decline – this could easily earn 4 cps. If at a PE of ten times this would trade at 40 cents. It could probably trade higher if it built up earnings momentum. The co has earned 7 cps in the past = 70c trading price. Co has also traded at $2.40 (adjusted for cap raises).
    Some positives
    - Reasonably high adjusted ROE

    - The debt levels of this co are declining over time – so the level of risk in this business is reducing.

    - Have their own IP and brands

    - There is a major shareholder external to the Cheetham family who is a director

    - Have maintained R and D (at about 3 to 5% of revenues)

    - Mostly maintain dividends even if small

    - Cashflow is better than profits by about $1.5m per annum

    - Exposure to a vanity industry with developing countries getting wealthier.

    - Diversified away from amalgam fillings

    - Strong current position

    - Internationally competitive

    Some negatives are
    - Maybe reducing debt is a sign of a lack of investment opportunity?

    - The MD is approaching 70 years of age. Can a new generation take over and do well?

    - No remaining Silver hedges in place

    - AUD may keep going up


    Wasn't worried by that level of ownership. It is possible that they could do something dodgy and not tell anybody - but they probably wouldn't bother being listed if that was their idea. I think they are listed to provide an exit at some stage. I actually think it is good to have a high level of ownership, except in cases where there are lots of joint ventures with director controlled companies.
    They will do everything possible to make this business work - skin in the game! They would be showing signs of dodgy happenings by now if they were dodgy, and the director with 8 mill shares would not stand for it - as he would lose out. He gets very little wage from the business.

    ReplyDelete
  4. Thanks for the post or share information.
    It was really helpful to solve my confusion.

    Occupational Medicine

    ReplyDelete

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