https://www.merewethercapital.com.au/blog/will-this-stock-have-investors-smiling/

In a nutshell SDI is the classic investment thesis of a good segment being muddied by a poor segment as SDI have grown their high margin (~70% gross margin) Aesthetics and Whitening brands by a CAGR of 12% over the last decade, including the disruption from Covid.

Unfortunately this growth was muddied by the terminal decline of Amalgam (-3% revenue CAGR over the last decade) which also has lumpy gross margins fluctuating with commodity (primarily silver) prices. With Amalgam <15% of revenue in the latest half year the dilution from this poor segment should no longer be a material impact moving forward.

On top of this segment transition, SDI was battered by Covid as they export ~95% of their products manufactured in Melbourne, with higher logistics and warehousing costs impacting gross margins through FY22 and FY23. The gross margin fell from 66% pre-Covid to as low as 52%, putting a significant strain on profitability. However with the recent half showing a gross margin improvement back to 62% (improving through the half, it was 59% at the AGM update), there is evidence these headwinds have eased.

Given the substantial revenue base the improved gross margin provides significant leverage to operating profits, with profit before tax increasing 67% and on track to maintain that growth through the full year. That would leave SDI trading on less than 10x normalised earnings, which I believe is far too low for a business with the underlying quality of SDI that has been masked in recent years and offers steady growth in a very defensive industry.