Foster Stockbroking bullish on SDI

Foster Stockbroking has initiated coverage of SDI with a buy recommendation and a 12 month price target of $1.36, a premium of 80% to Friday’s closing price of 75.5 cents.

It should be noted that broker projections and price targets are only estimates and may not be met. Also, historical data in terms of earnings performance and/or share trading patterns should not be used as the basis for an investment as they may or may not be replicated. Those considering this stock should seek independent financial advice.

Founded in 1971, SDI is Australia’s largest dental manufacturer with prominent positions in the areas of amalgam, whitening, aesthetics and equipment.

There has been a significant change in product mix in terms of revenue contribution over the last five years with less reliance on the volatile amalgam business and more of a focus on aesthetics.

While there is a large differential between the company’s recent trading range and the price target, the latter isn’t significantly higher than the group’s 12 month high of $1.16 that was struck just prior to providing a trading update in November that was poorly received.

Earnings skewed to the second half

Management’s main message in providing the trading update was that earnings would be skewed to the second half of the year and that the net profit after tax for the first half would be in a range between $2 million and $2.5 million compared with the previous corresponding period’s $3 million.

Management provided context at the time regarding the skew in earnings, as well as the potential for the foundations for long-term growth to be achieved in March 2017 when the group will have the opportunity to showcase its new products in Germany where it has distribution facilities.

With regard to the first six months, SDI Chief Executive Ms Samantha Cheetham said, “The first six months have traditionally been weaker than the second and I expect the second half will improve and I am confident of meeting our targets”.

Looking to the future, Cheetham said, “Our current focus is on the launch of new products in the second half and these will be showcased at the world’s largest industry trade show to be held in Germany in March 2017, underpinning future growth for the business and highlighting the research and development investments made”.

R&D and IP to drive future earnings and provide barriers to entry

This illustrates the increasing emphasis of research and development, as well as intellectual property in terms of driving the business. Foster Stockbroking sees this as an advantage, and the broker also highlighted that industry regulation is a key barrier to entry.

Taking a five-year view on SDI and eliminating foreign exchange variations, Foster said, “With the increasing momentum in non-amalgam products, we would not be surprised to see growth of more than 10% per annum”.

The broker initiated coverage with a buy recommendation and is forecasting a net profit of $7 million in fiscal 2017, increasing nearly 20% to $8.3 million in fiscal 2018.

This implies fiscal 2018 earnings per share of 7 cents, placing the company on a PE multiple of 10.8 relative to Friday’s closing price.