Plenty to smile about in SDI Limited's recent results


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When Priya Serrao was crowned Miss Universe Australia 2019 one small factor enhancing her beauty was her lovely white teeth.

They had been whitened using Pola, an advanced tooth whitening solution produced by SDI Limited. SDI are a leading manufacturer of specialist dental materials.

Unless you are a dentist, you have probably never heard of SDI Limited.

It doesn't have the glitz and glamour of a high profile consumer brand like Netflix or GoPro, but it has been quietly working away building an $80 million revenue business selling dental restorative materials in more than 100 countries.

From an investor's perspective it is often the unnoticed, boring companies that provide the best opportunities.

As an aside GoPro's share price has been in freefall over the past five years going from $96 to $3.87. Despite all those epic YouTube videos and having captured 94% of the US market for action cameras, they consistently lose money.

Returning to SDI, their product mix is spread across four categories, namely amalgam, equipment, aesthetics and whitening.

Amalgam has been steadily declining from 43% of total sales five years ago to 23% today.

In contrast, aesthetics and whitening have been growing strongly and now account for 70% of sales. Tooth whitening also has the highest profit margins which has lead to the gross profit margin expanding to 63%.

In the Instagram age aesthetics really matter.

A great smile is essential for all those close-up selfies. For example, Dr Michael Apa, an Aesthetic Dentist with practices in New York, Los Angeles and Dubai, has 450,000 Instagram followers himself and often treats other Instagram influencers and wannabees wanting to enhance their smile.

This trend towards increased consumer spending on personal beauty is providing a positive tail wind for SDI with aesthetics sales up 16% in 2019.

Total sales grew 7% to reach $79.6m in 2019. This was better than the five year compound annual growth rate of 4% and also exceeded the estimate of industry growth at 2%. A particularly strong driver of growth was the Middle East with sales increasing 36%.

Countering the improvements in aesthetics sales has been a steady decline in amalgam. SDI are actively exploring potential alternatives to amalgam and recently received a $3m grant from the Commonwealth Government to assist with this.

Profits surged 29% in 2019. In addition to the revenue growth profits were assisted by reduced research and development spending and tight expense control. Return on equity increased to 10.3%. In the previous two years return on equity was about 8.5%.

Cash flow is consistently strong with sufficient cash generated from operations to cover investment and dividends and repay all debts. The balance sheet is now debt free with a surplus cash balance of $6.5m. There has also been no need to raise any equity capital or issue new shares for the last 10 years.

In the last year the share price rallied strongly from about 60c. In May - June it was 90c to 95c before retracting to the current level of about 79c. At a PE ratio of 12.8 it is not particularly expensive.

There are plenty or risks associated with the business including the impact of currency fluctuations. 2019 results benefited from the declining Australian dollar but should it start to rebound from its current low levels that would put a brake on revenue and earnings growth.

There is also the likely continuation of the decline in amalgam sales which needs to be countered with alternative products or strong growth in the aesthetics and whitening area. The trend towards more cosmetic treatments should continue, but being a discretionary spend it is always threatened by possible belt tightening if economic conditions deteriorate.

Whilst there are a lot of factors to consider, SDI's recent results have provided plenty to smile about.

The author has holdings in SDI.

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Chris is a senior investment analyst with Spotee Consulting. He is an experienced leader and investment expert having worked in financial markets for over 25 years. This includes co-founding a stock market research business and running it for seven years until it was sold. He is qualified as a Chartered Financial Analyst and holds a Graduate Diploma of Applied Finance and Investment and Bachelor of Commerce Degree. He has been a regular contributor to Money since 2012.

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