Pandemic aside, it’s been more than two years since investors could buy shares in AIM-quoted SDI (SDI:AIM) on a price to earnings multiple below 20. You can now. The stock currently trades on a forward PE of around 19, and Shares believes investors with an eye for the longer-run recovery of the economy and stock market should invest now.

2022 has tossed many a challenge at SDI yet the company has not only continued to grow, it has done so above and beyond expectations. Analysts at FinnCap added an extra £2.5 million and £1 million, respectively, to fiscal 2023 adjusted revenue and pre-tax profit when the company issued its trading update in May.

Since then, the share price trend has been largely sideways, drifting from 151p to current levels, yet there remains a multi-year growth story with the potential to add substantial value to retail investor portfolios over time. 

SDI is a collection of subsidiaries that design and manufacture digital imaging, sensing and control equipment used in life sciences, healthcare, astronomy, manufacturing, precision optics and art conservation applications.

Its a model that closely resembles that of health, safety and environmental kit maker Halma (HLMA), a constituent of the FTSE 100, buying good value businesses that add consistent cash flow and profits to the overall company.

For example, SDI’s Atik cameras business helped carry the company through much of the pandemic, winning orders from PCR testing equipment manufacturers at a time when other SDI operating companies were struggling. It also helps that the group concentrates on industries where regulation is high, competitive moats can be enforced and capital investment is less likely to be impacted by economic downswings.

Not only does SDI’s growth stretch back multiple years, has been high-quality growth. Gross margins typically run at around 65%, high for a manufacturing business, while returns on equity and investment of around 22% to 25% beat industry averages.

Naturally, no investment is without risk. It has some exposure to China, where parts of the nation appear to bounce from one lockdown to another. It also relies on identifying a consistent stream of acquisition targets to help underlying growth.

That said, the company believes this is a very fragmented space with lots of bolt-on sized deals there to be done if the price is right, and management has a proven record for paying conservative prices and running a tight balance sheet. Net debt is about £8 million.

‹ Previous2022-07-21Next ›