The past couple of years have seen many a growth grenade tossed at SDI (SDI:AIM) yet the company has stuck to its largely successful knitting and we expect its fortunes to significantly improve through 2025. A casual glance at the share price chart might put a quick end to investors’ research into this small cap business, but that’s a mistake, in our view.
Consensus analyst estimates for this year (to 30 April 2025) have been sneaking higher in the past few months, a promising sign.
WHAT DOES SDI DO?
SDI is a collection of small niche business involved in the design and manufacture of various scientific, healthcare and manufacturing tools, things like digital imaging, sensing and control equipment used in life sciences, and precision optics used in R&D and astronomy.
It’s a buy and build model which resembles that of health, safety and environmental kit maker Halma (HLMA), a constituent of the FTSE 100, and science tools manufacturing peer Judges Scientific (JDG:AIM). The aim is to buy good value businesses which add consistent cash flow and profits to the overall company. These subsidiaries are run at arm’s length with growth funding provided when needed, and surplus cash creamed off to reinvest in new acquisitions.
Not only does SDI’s growth stretch back multiple years, but it has also been high-quality compounded growth that largely self-funded. Gross margins typically run at around 60% to 65%, high for a manufacturing business, while returns on investment and operating margins are in the double digits and above industry averages.
The end of the pandemic has tossed many a challenge at SDI as customers de-stocked after a prolonged spell of over-ordering. For example, its Atik cameras business helped carry the company through much of the pandemic, winning booming orders from PCR testing equipment manufacturers at a time when other SDI operating companies were struggling.
Higher borrowing costs haven’t helped either, but both issues now seem set to improve. This leaves substantial upside on the table, partly as SDI continues to find attractively priced acquisition targets to supplement organic growth, and from a change in market mood.
NICHE BUSINESSES
It helps that the company concentrates on industries where regulation is high, competitive moats can be enforced and capital investment is less likely to be impacted by economic downswings. Its recent (30 October 2024) acquisition of InspecVision is a great example, a £6.1 million deal that takes SDI profitably into the industrial metrology market, or precision measurement, an estimated $12 billion industry where British FTSE 250 firm Renishaw (RSW) is a global gorilla.
For the year to 31 December 2023, InspecVision produced adjusted operating profit of £950,000 on about £3.2 million revenue, numbers that offer plenty of promise that SDI can rebuild operating margins from 11% back toward the mid-teens to 20% of past years.
‘InspecVision is a high-quality, profitable business which fulfils our key investment criteria of trading in a growth sector, with international exposure and a strong management team. The acquisition presents a rare opportunity to buy such a good business poised to capitalise on future growth in the metrology market,’ said SDI chief executive Stephen Brown.
On the downside, SDI recently told the market that it expects a second-half weighted current year, which adds some uncertainty to upcoming interim results, due to report 5 December. It is also very small with limited daily trading volumes, which may not suit every investor.
That said, this is a stock which has previously traded on a 20-plus PE (price to earnings), now below 14 on a rolling 12 months basis. History is on its side, we believe. Over the last 10 years, SDI has grown turnover from £7 million to £65.8 million in the year to 30 April 2024 and adjusted operating profit from around £57,000 to £9.6 million. The share price has increased from around 10p to over 200p at its peak, yet today is available at 58p.
These articles are provided by Shares magazine which is published by AJ Bell Media, a part of AJ Bell. Shares is not written by AJ Bell.
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