Scientific Digital Imaging (LSE:SDI), otherwise known as SDI group, is an AIM-listed company that specialises in the design and manufacture of products for use within a number of imaging, sensing and control applications, including life sciences, healthcare and astronomy. The company has built a strong track record over recent years of strong organic growth within its subsidiary companies, and it has also grown aggressively through the acquisition of small to medium-sized businesses within its imaging and control verticals.
Additional positive sentiment was found in SDI’s trading update, where it noted that it had limited its exposure to the ongoing crisis in Ukraine and it has made solid progress in its recent acquisitions during the fiscal year of Uniform Engineering (February 2021), Scientific Vacuum Systems (January 2022) and Safelab Systems (March 2022).
During fiscal year 2021 and in the first half of fiscal 2022, SDI noted exceptional strength in its Atik Cameras division, based in Norfolk UK, which is SDI’s largest subsidiary business. Whilst Atik Cameras are typically used to capture long-distance astronomy images, the Atik division found a particular niche during the pandemic, as Atik cameras were used in real-time PCR DNA amplifiers for the testing of COVID-19.
Cautious guidance on the OEM segment
Whilst this provided a significant increase in revenues for the division in 2021, SDI noted in its annual report that the increase in orders were tied to one specific original equipment manufacturer (OEM), stating that the secured order would run for the duration of the 2021-2022 financial year. SDI has since provided cautious guidance on this segment, noting that demand is likely to taper as Covid-19 testing decreases.
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Somewhat surprisingly in the latest trading update, SDI saw further strength in this segment running through the full year, with the company noting that Atik cameras were still seeing strong demand from PCR-test manufacturers. Looking forward, there could be reason to believe this division may continue to grow in 2023. One of the largest diagnostics companies globally, the US-based Abbott Laboratories reported a blow-out result for Covid-19 testing sales in the first quarter of 2022: Covid-19 testing sales of $3.3 billion were achieved, up from $2.3 billion in the fourth quarter of 2021. In response to analyst commentary on the Abbott Laboratories earnings call, CEO Robert Ford made the below comments on Covid-19 testing:
“So I think what we saw was a lot of the testing that was being done in the major cities was shifted over to PCR testing, together with rapid testing, and that obviously impacted some of the routine hospital testing […]
“So I think that that’s an important aspect as we go into 2023 is do we have confidence that even in an endemic state does testing continue? And I would say, yes, it does continue. One portion that doesn’t get a lot of attention is our international testing business. 50% of our sales in March of Covid tests came from the international markets.”
Taking Mr Ford’s words into consideration, it is likely that the switch to PCR tests, the ‘gold standard’ in Covid testing, has boosted demand for Atik cameras. Given that the well-respected global diagnostics business Abbott Laboratories also anticipates a positive backdrop for testing sales in 2023, this can be seen as highly positive for SDI.
Fifteen businesses bought in nine years
With the acquisitions of Scientific Vacuum Systems and Safelab in 2022, SDI has acquired a total of 15 businesses in the last nine years. The close-out of results in fiscal year 2022 will likely showcase another year of responsible capital allocation. The graph below, created using SDI annual reports and house-broker estimates, shines a light on SDI’s use of capital over the last four years, with reference to free-cash-flow, acquisitions and equity raised. Typically, SDI’s acquisitions have been of small bolt-on size, with a typical year resulting in less than £10 million of acquisition spend. SDI has been prudent to facilitate these transactions using free cash flow retained within the business and by taking on only small amounts of debt. Since 2019, SDI has only placed a minimal amount of equity, to the benefit of investors.
With record results expected for SDI in 2022 and a strong demand backdrop for the company in 2023, house broker Progressive Equity has raised earnings forecasts for SDI in the year ahead. SDI is now expected to earn 8.4 pence per share on a fully adjusted basis in 2023, which, after a strong rally in the shares post issuing the latest trading update, reflects a forward P/E ratio of 20 for SDI.
With a strong track record for accretive acquisitions and consistent organic growth powering results for the business, the current valuation for SDI looks very reasonable indeed.