Gamble of the week: warehouse group with encouraging future

SDI Group is a much cheaper play than, say, Amazon on the booming e-commerce sector. It floated on Aim in June 2007 at 49p. The firm designs, builds and supports automated warehouse solutions for European retailers such as Decathlon, Asda/George, Primark, Matalan and TK Maxx.

This involves selecting and installing the best sorters, pickers and conveyor systems, together with integrating this state-of-the-art infrastructure with the appropriate networking software. Around 80% of SDI's turnover is capital-expenditure related.

Thanks to the severity of the downturn, recent results have been affected by orders being deferred and projects cancelled. That said, things are beginning to pick up. And looking ahead, the firm should benefit as retailers are forced to upgrade their existing facilities to reduce supply-chain costs, speed up stock turnaround times, and beef up their online capability.

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In fact, at the interim-results stage on 30 November, the firm reported that it had swung into the black, and was seeing "encouraging levels of enquiries". Although "due to the capital nature of our products, customers' decision-making processes remain longer than previously experienced", says chairman Mark McMenemy.

SDI Group (Aim: SDIG)

House broker Cenkos is expecting sales and Ebita for the year ending March 2010 to be £33.5m and £0.2m respectively. I value SDI on an eight-times Ebita multiple, which assuming a sustainable profit margin of 5% by 2011 adjusting for the £3.9m cash pile and applying a 12% discount rate gives an intrinsic worth of 13.5p per share.

So far so good, but what are the possible pitfalls? The group is a relatively small fish in a large pond so there is always the chance that it could get squeezed by its bigger rivals such as FKI Logistex, Vanderlande and Dematic. Further, a double-dip recession along with some of its customers filing for bankruptcy would damage its results. That said, order flow is improving, and once the current, temporary demand lapse ends, SDI should power ahead. Gordon Smith, the company's chief executive officer, seems to agree he has bought 3.75 million shares over the past nine months.

Recommendation: speculative BUY at 7.5p

Paul Hill also writes a weekly share-tipping newsletter, Precision Guided Investments