Taking A Bite Of The Global Dental Market
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With the silver price and foreign exchange rates working in its favour, and potentially a major improvement in competitiveness at hand in its Brazilian operation, SDI looks to be well-positioned for further growth.
One of Australia’s most successful manufacturing exporters is a company of which not many people have heard. But SDI Limited (SDI) sells its products to more than 110 countries, exporting more than 90% of what it makes, through its own subsidiaries and overseas distributors.
SDI is a world leader in specialist dental materials. Founded in Melbourne in 1972, and listed on the stock exchange in 1985, SDI makes and sells high-quality alloy amalgam fillings, adhesives, composites, sealants, cements, tooth whitening products, etchants and equipment, from its fully integrated Bayswater factory, which incorporates everything from a metals foundry to high-end glass and plastics proprietary design and manufacturing operations.
About 45% of sales are dental amalgams (metal alloy fillings), 21% whitening products, 25% aesthetic products, and 9% small dental equipment. (Behind the Perth Mint, SDI is the largest silver user in Australia.) Another way of slicing the mix of sales is 69% restorative dentistry, 22% preventive, and 9% equipment.
In the developed world, amalgam use is declining, as plastics and glass ionomers become the filling material of choice – indeed, in western markets, there are ‘mercury-free dentistry’ movements (mercury is a component of virtually all amalgam fillings.) SDI does attract criticism from these sources, but the company is at the very forefront of dental materials technology. In recent years SDI has moved its R&D focus to developing new and improved aesthetic products to increase its overall sales mix of these products, as amalgam products have a substantial silver raw material costs.
It has a portfolio of strong brands within the industry, including:
• Riva: glass ionomer restorative cement;
• Aura: a new composite material that gives dentists a simple way to ‘shade match’ restorations;
• Pola: a tooth whitening system; and
• Radii: a range of hand-held LED lights for quick ‘curing,’ or hardening of plastic fillings.
SDI ploughs about 3% of annual sales revenue back into research and development, intending to launch one new product a year, on average, as well as investing continually in enhancing its existing product range. A good example is Aura, which was launched in January/February in Australia, with a launch into overseas markets scheduled for April.
The company says the global restorative market is a US$3 billion market – it currently has less than 2% of this market. And the market in the emerging economies is only just taking off. In the emerging markets, where governments, health authorities and individuals are only just embarking on dental health campaigns, amalgam will be a major part of treatment, giving its relative cheapness and long-lasting (40 years-plus) properties.
SDI has offices, warehouses and packing operations in Australia, the USA, Brazil, Germany and Ireland. It has completed its first offshore factory, in Brazil, which will allow it to finish goods so as to qualify as local product: this will lessen the company’s tariff burden in Brazil and enable SDI to be much more price-competitive throughout South America.
Two of SDI’s biggest exposures are to exchange rates - particularly the A$ against the US$, euro, pound and the Brazilian real – and to the silver price. While the silver exposure is actively managed through three-month rolling hedges, the company feels its substantial operational, employment and cost base offshore acts as a natural currency hedge – although it does use foreign exchange hedges from time to time, to protect its margins. About 57% of SDI’s total operating expenses relate to its offshore subsidiaries.
As it happens, over the last 12 months the silver and currency exposures have moved from being headwinds to tailwinds for SDI. A year ago, the A$ was trading above parity with the US$, and silver was at US$35 an ounce. At an exchange rate of US89 cents and a silver price of US$21 an ounce, SDI is much better positioned.
In FY13 SDI more than doubled its net profit, from $2 million in FY12 to $4.7 million, despite revenue rising only minimally, from $56.4 million to $56.6 million. Earnings per share (EPS) rose from 1.7 cents to 3.9 cents, while a dividend per share (DPS) of 0.5 cents was paid. Return on assets (ROA) was 7.3%, while return on equity (ROE) was 10.9%.
For the half-year ended December 2013, revenue rose by 13.5% to $30.4 million, while net profit climbed 20.4% to $2.7 million. This result includes a one-off net tax adjustment benefit of $200,000. On an earnings before interest and tax (EBIT) basis, earnings fell by 12% to $3 million.
Sales were flat in local currency terms but the weaker Australian dollar saw sales revenue reported in A$ rise 12.3% to $30.1 million. In local currencies, North American sales fell by 5.6% and European sales declined by 2.4%, but Brazilian sales surged by 24.4%. Australian sales, which include direct exports to Latin America and the Middle East, rose by 9.8%.
SDI provided full-year guidance with the interim report, saying that if economic conditions remain stable, including foreign currency rates, it estimates that it will achieve FY14 net profit of $5.2 million–$6 million. Such a range would equate to EPS of 4.4 cents–5 cents, which would place SDI, at 59 cents, on a range of 11 times–13.4 times prospective FY14 earnings, on company guidance.
Yield is not a consideration: even if the FY13 dividend of 0.5 cents (fully franked) were repeated in FY14, the resulting prospective yield would be 0.85%.
Capitalised at $70.1 million, SDI has been a solid performer in recent years, delivering total return (capital growth plus dividends) of 22.7% a year over the past five years, and 44.6% a year over three years. For the most recent 12 months the return stands at 26%. With the silver price and foreign exchange rates working in its favour, and potentially a major improvement in competitiveness at hand in its Brazilian operation, SDI looks to be well-positioned for further growth.
James was founding editor of Shares magazine, and oversaw one of the most successful magazine launches in Australia. He has also written for BRW, Personal Investor, The Age and Management Today, and was subsequently personal investment editor at The Australian and editor of financial website, investorweb.com.au