A steady as she goes update from SDI today, though maybe there is more below the surface of the reported numbers.

We got guidance of $53.1m revenue, up 3% on last year mostly driven by favourable currency movements (constant currency actually down 1.2%). The legacy Amalgam segment continues to drag, down 19% on last year, but now just 10% of sales so it should have a weaker effect on headline numbers moving forward.

Back of the envelope calculations show non-Amalgam segments growing at ~6% a year, not quite the high single digit/low double digits I'd hope for but still solid. Gross margins continued their strong recovery, now back to pre-Covid levels at 66.1%. This means gross profit grew 7%, or $2.3m incremental dollars.

Despite the extra $2.3m in gross profit, guidance is for NPAT to be flat, with the mid-point of guidance in line with the $3.8m NPAT reported last year. I suspect part of this will be some modest growth in operating costs (though they have been steadily controlled between $27-28m per half for a couple of years now) and SDI management putting out conservative guidance.

However I think the biggest headwind to reported statutory numbers will be currency impacts on cash balances that flow through the P&L. In 1H25 this was a ~$300k benefit, and with favourable currency movements for operating results will likely mean a similar sized loss in 1H26.

We'll have to wait until late Feb for full results to confirm but I think this will be one where the underlying results will be much stronger than the reported.

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.