SDI Ltd (ASX:SDI) is a developer, manufacturer and distributor of dental restorative materials and small dental equipment. With it’s suite of non-amalgam, significantly higher margin products - glass ionomers, composites and professional whitening - all experiencing growth, the company has guided to NPAT of $7.2-$7.8m in FY16 and is trading on 11x trailing earnings, and likely a single digit forward multiple with growth expected in FY17.
SDI operates in the dental supplies and treatments market which is expected to be worth US$8.8b by 2019 and growing at 7% CAGR out to 2020, with certain sub-segments like glass ionomers anticipated to grow at a faster rate. Market growth is being driven by the ageing population as the baby boomers, who were the first to grow up with the teachings of preventive dentistry and drinking fluoridated water, are expected to be “the first generation to anticipate dying with their teeth.” Growing middle class wealth and improved access to dental services is also driving growth in markets throughout Latin America and Asia, where the greatest rate of growth in dental consumables and restoratives is expected to occur.
With amalgam revenue remaining relatively flat over the last 10 years, all of the growth has been generated by sales of next generation restorative products like glass ionomers (35% CAGR since 2009), composites and professional whitening. Since these products are substantially higher margin SDI has been able to grow normalised earnings by circa 20% per annum over the last three years despite average revenue growth of 4.5% a year over the same period. FY15 marked the first time that these growing product segments comprised the majority of total revenue, with their contribution to sales and earnings only expected to grow.
SDI’s peers like Coltene (SWX:CLTN), Dentsply Sirona (NASDAQ:XRAY) and Shofu Inc (TYO:7979), all trade on forward multiples of 18-23x, yet SDI trades on ~9x FY17 earnings. The market is yet to price in the favourable market tailwinds and the significant progress the company has made in it’s higher margin, higher growth product ranges. As a result, SDI looks attractively priced and well positioned for a re-rate as the market recognises the growth being achieved by the company's newer products.
Founder of Capital H Management and Portfolio Manager of the Capital H Inception Fund. Previously worked for Pie Funds and Bligh Capital.