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SDL achieves margin expansion

After last year’s dampened gross margin, machine translation and reduced freelancer costs drove a recovery
August 7, 2018

SDL (SDL) made good headway on its multi-year transformation programme in the first half, after challenges in 2017 dampened revenue growth and the gross margin. The numbers looked even more impressive on a continuing basis – with sales up 2.8 per cent, and pre-tax profits up 30 per cent to £7.8m, ignoring the £20.6m profit generated from business disposals last year.  

IC TIP: Buy at 516p

Most encouraging was the improvement in (continuing) gross margin from 50.5 per cent to 52.9 per cent – supported by the dominant language services division, where the margin rose 3.4 percentage points to 41.8 per cent, on 2.6 per revenue growth to £91.8m. Heightened efficiency here stemmed from greater usage of machine translation, more work being undertaken in-house, and the ‘Helix’ automation programme – which was processing 9m words each week in July. SDL’s goal of reaching exit-rate gross margins of over 45 per cent by the end of 2018 looks increasingly feasible.

The company has also intensified its focus on premium, higher-value content often found in regulated industries. July’s $77.5m (£59.9m) acquisition of Donnelley Language Solutions enhances SDL’s positioning in financial services and life sciences, and should be earnings-accretive in 2019. SDL’s other two segments also enjoyed sales momentum – though language technologies’ gross margin dipped on a change in sales mix.

Investec forecasts adjusted pre-tax profits of £27.3m and EPS of 23.8p for 2018 (from £22m and 18.7p in 2017).

SDL (SDL)    
ORD PRICE:516pMARKET VALUE:£ 467m
TOUCH:512-522p12-MONTH HIGH:560pLOW: 333p
DIVIDEND YIELD:1.2%PE RATIO:28
NET ASSET VALUE:214p*NET CASH:£22.5m
Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
201714120.922.9nil
20181437.86.8nil
% change+1-63-70-
Ex-div:na   
Payment:na   
*Includes intangible assets of £158m or 175p a share