Scientific Digital Imaging - Under Inspection

http://www.scientificdigitalimaging.com

Scientific Digital Imaging Logo

When a company joins the Alternative Investment Market, it can sometimes take a while for the company to adapt, with corporate issues such as acquisitions often pursued meaning that the share price can be unpredictable. In addition, it can be difficult for the share price to gain any real traction due to uncertainty. Scientific Digital Imaging (LSE:SDI) (abbreviated as ScienDI from now on) perhaps fits this criteria, but its share price performance has ultimately disappointed since it listed in late 2008. That hasn't been helped by poor liquidity either. ScienDI's operations revolve around supplying high-tech equipment and products to the Health Care sector across the US, Europe and Asia. With a current share price of 23p and 25m shares in issue, the company is capitalised at £5.76m following a placement earlier in the year.


As is often the case with illiquid stocks, charting isn't particularly useful, so you end up pointing out trends  and highs and lows, without really being able to do much analysis. ScienDI is trading yowards the upper end of the low-high bracket at 23p, and is trending upwards slightly which is positive. That is also good news in that it is underscored by increasing volumes. The trading range is wide and considering the shares are reaching back towards their original level it wouldn't be unreasonable to expect some sort of a breakout considering the fundamentals which I'll discuss later. There really is not a lot more that can be said about the chart.

There are no recent broker targets for ScienDI but Finncap do have a 40p target present from late 2012. The spread on the stock is fairly narrow for an AIM stock with it around 4% a fair amount of the time. Chairman Ken Ford and CEO Mike Creedon did both purchase shares recently at 16.50p and 18p respectively which is a sign of confidence although the amounts in question were not huge at around £17.5k combined. Nevertheless, as always, some director investment is better than none! Multiple institutions also hold shares in ScienDI including Dana Investments who added in the company's placing earlier in the year. More recently, Herald Investment Management took a 9.73% stake in the company.

Chairman Ken Ford does not have a large amount of industry experience, but what he lacks in that respect, he makes up in his understanding of corporate finance and what shareholders are after. He is also Chairman of AIM listed Brainjuicer Group (LSE:BJU). Part of Mike Creedon's career has included the following: In 2006 Mike was appointed as interim finance director at NextGen Group plc, an AIM listed company focusing on the design, manufacture and sale of services and equipment to the biotechnology and pharmaceutical sector, following which Mike has been acting as chief financial officer at Durham Scientific Crystals Limited, a company whose principal activity is the development, manufacture and sale of products for the x-ray imaging market.
As per the company's website, ScienDI is focused upon applying digital technologies to the scientific trade. The company operates through two principal subsidiaries.

- Synoptics: Synoptics operates under 4 divisions;
    - Syngene: produces equipment for life scientists to image and analyse electrophoresis gels used for DNA and protein analysis
    - Synbiosis: produces equipment for microbiologists to automate microbial colony counting
    - Syncroscopy: provides systems which apply digital imaging techniques to microscopy applications, such as life and material sciences
    - Synoptics Health: focuses on imaging techniques within the clinical environment
- Atik: Designs, manufactures and sells high-tech cameras used in Astronomy. Atik has dealers for its cameras across the globe although they are mostly concentrated in and around Europe. The market for these is very niche as you would expect but ScienDI does seem to have built up some reputation in this field. Atik was formerly two businesses (Artemis and Perseu), but these now both operate under the same 'Atik' umbrella brand

One of the company's more interesting developments is that Synoptics Health has recently released their ProReveal system. This is designed to ensure that surgical tools are clean prior to their re-use, by using a fluorescence technique to show up any proteins if they are present. Obviously, for medical uses the cleanliness of tools is of utmost importance as any infections or other medical conditions are not wanting to be passed between patients. The system produces a result after a few minutes of protein detection and after this, a visual presentation of the location of the protein is shown (if any remained). Therefore, this system is used after the cleansing process - it validates whether that cleansing has been thorough enough.
The ProReveal System
One of the most important advantages of the system is that is can detect even tiny amounts of proteins (less than 50 nanograms) - that is a better result that can be obtained by the more conventional Ninhydrin test. The Ninhydrin test involves using a chemical reagent to test for the presence of amino acids (protein sub-units). If the amino acids are present, a purple stain will be created. This method is less reliable as it cannot detect the smallest amounts - when dealing with medical equipment, even the smallest amounts create unnecessary risk. The in-situ ProReveal system is patented as is the reagent spray that is used. Indeed, Synoptics Health note: "The quality of any washer disinfection process is dependent on a number of variables; type of washing machine, the process, instrument position in the washing tray, water quality, detergent, to name just a few. Hence, an effective check process is required to ensure that surgical instruments have been cleaned to the required standard during the washing process."

The fluorescence technique is relatively new for the industry, so ScienDI has first mover advantage to some extent. The system is advantageous in that it also doesn't rely on swab tests (that only inspect a portion of the instrument) or a human's visual interpretation. The system seems easy to use as well  which is always important and provides a 3D view of the scanned object. A further, and more integral benefit of ProReveal is that it can be linked up with a computer system so that tests are logged properly along with their results. The whole process for residual proteins typically takes around 210 seconds (as that is how long it takes for the reagent to react with any proteins) but the important point to remember is that you don't complete the scan for every surgical item. You complete it for one, and then wash the batch again if necessary.

However, I am certainly not a scientist who can accurately assess how useful the product is. On the face of it, it seems a credible system, but I certainly can't justify how much demand for it there will be. Someone with a more valuable assessment of the product is Bruce Garbutt, Training Consultant at Eastwood Park (where ScienDI recently secured usage). He said: "Protein decontamination is the ultimate in cleaning efficacy. If your process has removed protein you know your surgical instruments can be made safe to re-use. It is possible to infect patients with prion diseases like vCJD if the cleaning processes are not optimal and we have begun to realise how swab tests to detect prion levels can be flawed, hence the imperative for an 'in situ' test such as ProReveal." If the system is taken up by the industry, there is the potential for it to be used across over 300 SSD's, hospitals and decontamination companies in the UK alone.

The company does have several other interesting products that I won't go into, but another one to note is Synbiosis' ProtoCOL3 which is a scientific colony counter that has a digital interface. It is shown on the right. ScienDI announced an order for ProtoCOL3 back in February. The order was to the Chinese State Food and Drug Administration (which is the Chinese equivalent of the FDA). The sale of the 25 units was completed through a Chinese distributor of the system and was worth $120,000 (average of $4800 per unit). What may be clear is that ScienDI makes the most of its revenues through smaller purchases as opposed to these larger ones. For that reason, revenues increase progressively, but at a fairly slow rate. The distribution channels the company has, including Peskett Solutions, does inspire confidence as there a number of synergies that could be exploited.

The ProtoCOL3 System
A crucial set of corporate events took place in June. The first part of the events was that the company undertook a £850,000 equity raising. The reason for this was that there was an outstanding £379,000 loan note that needed re-paying, the deadline for which was upcoming. However, the placing was done at a disappointing 15p/share which represented a discount of around 30% which is actually typical for an AIM company, especially since the attraction of the placing to investors at the time, will have been limited, not least because the 2012 Final Results had not been released. As per the chart at the start of the review, the share price has recovered since. Surprisingly, a £50,000 loan note was taken out in conjunction with the placing through major shareholder Dana Investments - the reason given was that the money would be used for working capital purposes.

Within the trading statement as part of the events, the following announcement was made: The Company is beginning to see a tentative recovery in its markets and with the introduction of Synoptics Health within the Synoptics division and a number of innovative systems, SDI's current sales pipeline continues to grow. The Board is encouraged by the response to its newly launched ProReveal system where technology has been developed to detect nanogram levels of protein contamination on surgical instruments and could, the Directors believe, help reduce the number of cases of post-operative infection. Also included was a note that cost savings had taken place during the year, which, with increasing revenues should mean increasing profitability.

The full-year financial results are as below:

 
There are a couple of things that they show. Firstly, that revenue continues to grow, at a modest place, but more importantly, that the company has been able to translate that into an increasing Pre-tax profit. The % change for those is somewhat misleading given the low initial figures, but you can see how a small absolute change in profit can lead to a markedly higher increase in Basic EPS. The figures shown are pre-placing, so the cash figure will have been boosted. More specifically, over the period, revenues in Germany, North America, the Rest of Europe, Asia in general and Hong Kong rose, whilst revenues from the UK and India fell. Following the repayment of the loan note, around £100,000 of borrowings remain on the company's books.

With Basic EPS of 1.05p, that means ScienDI are trading on a PE ratio of 21.9 which seems slightly high with what should be expected for a small, low growth company, no? Well, not exactly. Given the influx of shares from the recent placing, that EPS can now be adjusted down to around 0.76p which is a 2012 PE Ratio of 29.8 which is certainly stretched. The catch is whether ScienDI can leverage ProReveal and its other products to become classed as high-growth, thereby demanding a higher PE ratio. It's too early to conclude at the moment, so classing it conservatively makes sense at this point in time. 

Crunching some numbers, analyst forecasts for Scientific Digital are £400,000 in pre-tax profit for 2013. I am somewhat sceptical over how these figures have been derived as the EPS also forecast of 3.8p seems way off the mark (probably some sort of black magic). That EPS figure has also been stated by numerous other publications, but I am yet to see their methodology for this. For simplicity, taking 25,000,000 shares in issue with £400k in profits gives an EPS of 1.6p, which equates to a 2013 PE multiple of 14 which seems a tad low, so that may well correct closer to the next set of results. A fairer PE multiple would be around 20x which implies a share price just north of 30p. Nonetheless, the company needs to be careful that, should its sales start to gain traction, variable costs don't rise too fast. Furthermore, the company has outlined that it may seek acquisitions should the opportunity arise - if more shares are issued, that EPS figure will drop accordingly. Should ScienDI exceed the estimates and deliver £600,000, that EPS is driven up to around 2.4p which implies a 2013 PE ratio of 9.5x - at that level it starts to look attractive. However, given the lack of financial visibility, it's once again best to let the company deliver before speculating. It's clear though that the upside remains in driving up profits on relatively smaller revenue increases.

Scientific Digital Imaging is one company I will continue to have under inspection. The products seem pretty good, especially ProReveal, and should that start to gain some sales traction, it should be very profitable for the company. There are some reservations I do have though - for example, why would someone choose to use ProReveal if the Ninhydrin test is sufficient for the protein regulations in their region. The cost of ProReveal is unlikely to be trivial, and that is the problem. However, you would expect that the product will get the green light from the Health Care sub sectors that require absolute cleanliness, and as shown by the recent development, for training courses. ScienDI does seem to have some growth potential even though the CEO noted that the market recovery to date had only been tentative. I remain confused about the EPS figures stated around the media so will stick to what I can derive myself - currently the fundamental upside seems limited, unless there are significant sales wins. The product promise is enough to keep this on my watchlist, but anything more meaningful would be a bit premature at the moment, especially with the uncertainty of 'acquisitive growth'. No Rating

4 comments:

  1. hi El1te.

    Had a sneak around and noticed that Shares magazine are also quoting that 3.8p eps. I can confirm it is indeed 'black magic'!!!!!!!

    CraigJ

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  2. Agree with your ideas on this one. I was tempted at 15p, but think it's a bit highly valued after the equity raise

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  3. Any information about the recent drop from 21p to 14p in share price ?

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