I wish I’d bought shares in UK tech stock SDI (LSE: SDI) in March near the bottom of the market plunge. At today’s price near 102p, the shares are around 180% up from their spring lows.
So, what’s gone so right for the digital imaging, sensing and control products manufacturer through the pandemic? Today’s half-year results report contains some decent figures. And there was a “strong” contribution from products designed for equipment used to test for and treat Covid-19. And that offset the negatives suffered by the company through the crisis.
Why SDI is a UK tech stock I’d like to buy
In the six months to 31 October 2020, revenue rose by 23% year on year. And adjusted earnings per share advanced by 45% backed by a solid rise in cash from operations of 130%. Meanwhile, net debt plunged to £0.34m from just over £4m six months earlier. And I reckon the strength of the company’s cash performance demonstrates the quality of the business model.
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SDI has a decent five-year record of balanced growth. Revenue, earnings, cash flow and the operating margin all rose incrementally at a decent clip. Indeed, the compound annual growth rate for earnings works out at about 25%. And I find other quality indicators to be encouraging. For example, the return-on-capital figure runs near 11% and the operating margin is around 14%.
There’s no doubt the firm adapted well to changing customer demands through the pandemic. But will growth continue? City analysts have pencilled in a modest increase in earnings of just over 4% for the full year to April 2022. And that’s much lower than the 67% advance in earnings they expect for the current trading year to April 2021. But I think SDI looks well placed to grow its business over the long haul.
A sharp focus on deal-making
The business model is interesting. SDI operates as a collection of smaller businesses, each focused on its own area of speciality within the wider sector theme. And the SDI boardroom is populated by accountants and money men. For example, chairman Ken Ford has a background in investment banking and chief executive Mike Creedon is an accountant with an MBA. Then there’s chief financial officer Jon Abell. However, missing from the board line-up is any position of chief technical officer, chief operating officer or similar. So, it seems the overall business is run with an accountant’s-eye view. And the technical and operating expertise is likely found closer to the ‘coal face’ in the underlying operating divisions.
But I think the set-up is a good thing. SDI is growing by buying bolt-on businesses and tuning them up to run at maximum performance. The post-period-end acquisition of Monmouth Scientific Limited is a good example of the strategy in action. And when it comes to evaluating the viability of acquisitions, accountants and deal makers could arrive at the negotiating table with cool and logical heads. It’s the kind of approach to business that made Warren Buffett’s Berkshire Hathaway so successful.
With the shares near 102p, the forward-looking earnings multiple is just above 20. That looks like a full valuation. But I think the quality of the business justifies it. And I’d be keen to buy some of the shares on dips and down-days to hold for the long term.
