Many of the best-known technology shares belong to US firms. Today, I want to look at UK tech stock I think could be one of the best growth shares to buy now.
SDI Group (LSE: SDI) makes scientific and technology products for digital imaging and other applications. The SDI share price is up by 25% today following an upgrade to guidance. Today’s gain means the shares have doubled over the last 12 months.
I’d like more technology exposure in my portfolio, but I’m wary about overpaying. Could SDI fit the bill, or are the shares now fully priced?
The good news: profit upgrade
This morning’s surge higher was triggered by an update on recent trading at SDI. The company says two of its businesses have secured “significant one-time contracts” for equipment relating to Covid-19 testing and treatment.
The testing order appears to relate to the Atik Cameras imaging and astrophotography business. This group has secured an order for cameras to be used in PCR DNA amplifiers which, in turn, are used for Covid-19 testing.
SDI’s guidance suggests the benefit of these contracts will outweigh weaker results elsewhere in the group. Management believe they now have enough visibility on orders to upgrade profit guidance for the 2021 and 2022 financial years.
The firm now expects adjusted pre-tax profit for 2021 to be more than £6.7m, up by 55% from 2020. In the 2022 financial year, profits are expected to rise by another 30% to £8.7m. I’d be happy to pay a premium to buy a UK tech stock with this rate of growth, if I thought it could be maintained.
A word of caution
SDI’s financial year ends on 30 April, so today’s profit guidance applies to the period between now and 30 April 2022. I think it’s fair to assume that the Covid-19 pandemic will probably have passed by then.
If I’m right, demand could fade for Covid-related products from SDI. This could be a concern, as my feeling is that Covid-19 is currently making a significant contribution to group profits. If this demand slows, profit growth could fall sharply, or even go into reverse.
Of course, growth in other parts of the business may offset any future decline in Covid-related sales. At this point, it’s a little hard to know. However, I prefer to take a cautious view when buying shares in companies with an uncertain outlook.
SDI: the best UK tech stock to buy now?
My sums suggest SDI’s share price surge has left the stock trading on about 26 times 2021 forecast earnings. For 2022, that multiple falls to around 20 times.
I’m impressed by SDI, which has delivered strong growth in recent years through a mix of small acquisitions and organic growth. But my feeling is that the outlook for earnings is less certain beyond April 2022.
On balance, I think SDI shares are probably fairly valued at the moment. I’ll keep watching, but I don’t plan to buy the shares just yet.
Roland Head has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.