Here’s why I’m putting this UK tech stock on my Christmas list

After a strong performance through the pandemic, I think there’s a decent long-term growth story to play for with this UK tech stock.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

I wish I’d bought shares in UK tech stock SDI (LSE: SDI) in March near the bottom of the market plunge. At today’s price near 102p, the shares are around 180% up from their spring lows.

So, what’s gone so right for the digital imaging, sensing and control products manufacturer through the pandemic? Today’s half-year results report contains some decent figures. And there was a “strong” contribution from products designed for equipment used to test for and treat Covid-19. And that offset the negatives suffered by the company through the crisis. 

Why SDI is a UK tech stock I’d like to buy

In the six months to 31 October 2020, revenue rose by 23% year on year. And adjusted earnings per share advanced by 45% backed by a solid rise in cash from operations of 130%. Meanwhile, net debt plunged to £0.34m from just over £4m six months earlier. And I reckon the strength of the company’s cash performance demonstrates the quality of the business model.

SDI has a decent five-year record of balanced growth. Revenue, earnings, cash flow and the operating margin all rose incrementally at a decent clip. Indeed, the compound annual growth rate for earnings works out at about 25%. And I find other quality indicators to be encouraging.  For example, the return-on-capital figure runs near 11% and the operating margin is around 14%.

There’s no doubt the firm adapted well to changing customer demands through the pandemic. But will growth continue? City analysts have pencilled in a modest increase in earnings of just over 4% for the full year to April 2022. And that’s much lower than the 67% advance in earnings they expect for the current trading year to April 2021. But I think SDI looks well placed to grow its business over the long haul.

A sharp focus on deal-making

The business model is interesting. SDI operates as a collection of smaller businesses, each focused on its own area of speciality within the wider sector theme. And the SDI boardroom is populated by accountants and money men. For example, chairman Ken Ford has a background in investment banking and chief executive Mike Creedon is an accountant with an MBA. Then there’s chief financial officer Jon Abell. However, missing from the board line-up is any position of chief technical officer, chief operating officer or similar. So, it seems the overall business is run with an accountant’s-eye view. And the technical and operating expertise is likely found closer to the ‘coal face’ in the underlying operating divisions.

But I think the set-up is a good thing. SDI is growing by buying bolt-on businesses and tuning them up to run at maximum performance. The post-period-end acquisition of Monmouth Scientific Limited is a good example of the strategy in action. And when it comes to evaluating the viability of acquisitions, accountants and deal makers could arrive at the negotiating table with cool and logical heads. It’s the kind of approach to business that made Warren Buffett’s  Berkshire Hathaway so successful.

With the shares near 102p, the forward-looking earnings multiple is just above 20. That looks like a full valuation. But I think the quality of the business justifies it. And I’d be keen to buy some of the shares on dips and down-days to hold for the long term.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Kevin Godbold has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Berkshire Hathaway (B shares) and recommends the following options: long January 2021 $200 calls on Berkshire Hathaway (B shares), short January 2021 $200 puts on Berkshire Hathaway (B shares), and short December 2020 $210 calls on Berkshire Hathaway (B shares). Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Illustration of flames over a black background
Investing Articles

2 red-hot UK growth stocks to consider buying in April

These two growth stocks are performing well, but can they continue to deliver for investors through 2024 and beyond?

Read more »

Charticle

Is JD Sports Fashion one of the FTSE 100’s best value stocks? Here’s what the charts say!

The JD Sports Fashion share price remains a wild ride during the first quarter. Could it be one of the…

Read more »

Investing Articles

Could the JD Sports Fashion share price double in the next five years?

The JD Sports Fashion share price has nearly halved in the past five years. Our writer thinks a proven business…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

If interest rate cuts are coming, I think these UK growth stocks could soar!

Falling interest could be great news for UK growth stocks, especially those that have been under the cosh recently. Paul…

Read more »

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »