Shares digital

SDL (SDL) – 242p, stop loss 194p

SHARES SUMMARY

Has become one of the world’s largest translation companies, providing global information management. Profits are rocketing but the rating has slumped. Time to buy in any language.

Business:

Leader in global information management providing multilingual translation services

Vital stats:

Market Value: £180 million

Historic PE 2006: 25.5

Prospective PE 2007: 15.2

Prospective PE 2008: 13.5

Sector PE: 15.9

1-month relative strength: -5.2%

1-year relative strength: -2.7%

Yield for 2007: n/a

NMS: 250

Spread: 2.8%

Though profits have trebled in just two years, shares in SDL are little higher than they were in late 2005. The bullish trading update this week said that profits before tax and amortisation will be 5% ahead of analyst’s expectations at almost £17 million for 2007 compared to £12.2 million last year.

SDL is on a roll and the market has not appreciated the quality of this company and its long-term prospects. The performance is even more notable considering half its revenues are in dollars or dollar-related currencies where there has been a 9% depreciation.

Trading has been strong across both the technology and services divisions. Tridion, the web content management business bought last April for £45 million, looks an inspired purchase with profits soaring.

Analyst Kevin Ashton at Landsbanki reckons Tridion is a core part of SDL’s long-term growth strategy. The combination of Tridion with SDL’s translation management system is a highly effective tool allowing SDL’s customers like ABN-AMRO, Bosch, Canon, Microsoft and Virgin Atlantic to mesh it with their own enterprise software systems to create and deliver global web content for sales, marketing and customer support.

SDL has implemented around 600 enterprise global information management solutions (compared to just over 400 at the end of 2006) selling over 150,000 software licenses and provides on-demand translation portals for 10 million customers a month.

It employs more than 1,000 professionals who provide consulting, implementation and language services through 50 offices in 30 countries.

This infrastructure and market leadership in software and internet processing makes it very hard for another company to challenge SDL’s global leadership. Indeed if Apple, Autonomy, Yahoo or Microsoft want to expand into this sector buying SDL would be the obvious step.

Admittedly if English becomes the only means of communication worldwide then SDL might find itself out of business. But this looks unlikely. Meanwhile the company is making hay out of globalisation. More and more companies have to communicate in dozens of languages to their employees and customers.

Language, and its correct usage, has become a major competitive factor in winning and retaining market share for companies that are growing globally.

Interim profits showed gross margins up two percentage points at 52% and this trend has further to run with maybe 60% possible by 2012 .

More acquisitions are expected to further enhance the SDL package. Cash is being generated at a ferocious rate with a half year surplus of £4 million over borrowings.

Pre-tax profits will top £16 million for 2007 compared to £9.4 million in 2006. They could soar to nearly £21 million this year and maybe £26 million in 2010.

For a company with this sort of growth, balance sheet strength and global leadership, a 2008 PE of 13.5 is far too low.

by: Timon Day