The Motley Fool

Is this small cap’s 7.1% dividend yield too good to ignore?

Yesterday evening, dental technology business SDI Limited (ASX: SDI) reported its annual result for the 12 months to 30 June 2018 showing an increase in sales and profit.

Sales increased by 0.5% to $74.5 million in Australian dollar terms. SDI exports around 90% of its products, when adjusting for currency sales increased by 0.6%.

Pleasingly, SDI’s best region for sales delivered strong growth, Europe sales increased by 9% to $27.9 million. Aesthetics sales grew by 9.3% in local currency terms, it now makes up 38.9% of totals. This is offsetting the continuing trend of declining sales of Amalgam, which fell 12.7% in local currency terms during FY18.

The gross profit margin increased by 110 basis points, or 1.1%, to 61.1% from 60% in the previous year. This was partly due to product & market sales mix as well as improving economies of scale. Its leaner manufacturing process is expected to deliver $1.1 million of annualised savings.

Earnings before interest, tax, depreciation and amortisation (EBITDA) decreased by 2.8% to $12.1 million. Operating cash flow increased by an impressive 20% to $11.3 million.

Net profit before tax (NPBT) decreased by 0.6% to $8.1 million and net profit after tax (NPAT) increased by 1.5% to $5.7 million.

Earnings per share (EPS) increased by 1.5% to 4.76 cents and the FY18 dividend was increased to 2.5 cents, which represented growth of 8.7%. The dividend payout ratio for FY18 is a healthy 52.5%.

The balance sheet is in a much stronger position than it was a year ago. Borrowings decreased by $1.9 million to $2.2 million and cash increased by $2.4 million to $8.2 million. Inventories decreased by $2.6 million due to continued improvements in inventory management thanks to better manufacturing processes and higher than expected sales in May and June.

The company has released a number of products recently and is aiming for one to two new products per year to drive growth. It’s concentrating on categories that deliver high sales margins.

Foolish takeaway

It’s currently trading at under 11x FY18’s earnings with a grossed-up dividend yield of 7.1%. SDI looks like a solid business that is cheap, has a good balance sheet and has an attractive yield.

The company thinks that it has good growth ahead as quality dental hygiene demand grows in emerging markets.

I’d be happy to buy a small parcel at the pre-open price of $0.50.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia has recommended SDI Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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