A first-half results update from SDL (LSE: SDL) was subtitled Delivering our transformation, but unfortunately it transformed the share price into one worth 22.5% less — down to 498p as I write.
The content management and translation services specialist is in the first year of a three-year turnaround plan, and today’s figures show how much that is needed.
Before one-off items, profit before interest, tax and amortisation slumped from £9.5m at the halfway stage in 2016, to £4.9m this time, and adjusted earnings per share crumbled to 3.19p from 9.11p.
What’s more, chief executive Adolfo Hernandez said that margins in the second half are now expected to be “to be slightly below… the second half of 2016,” telling us that “the first half performance has underlined the importance of the actions already under way to invest in our turnaround.“
Forecasts for a 29% EPS rise seem unlikely to be met now, and even if full-year EPS remained flat we’d still be looking at a P/E of 22 based on the fallen share price — and that’s with dividend yields of only around 1%.
Unmissable bargain?
Is this an oversold bargain to snap up now, or is it one to avoid?
Translation software and services should continue to see rising demand around the globe, and SDL’s investment in things like cloud technology and machine translation are to be welcomed.
But I’m wary of a technology company having to play catch-up, which is what chairman David Clayton seemed to imply when he said that “our growth in revenue, particularly within our Language Services business had been consistently lower than the market.“
I also don’t like the sudden surprise of today’s announcement, and I can’t help fearing there’ll be more profit warnings before things turn around. I would not buy right now.
Irresistible dividends?
LSL Property Services (LSE: LSL) investors had a better day, seeing their shares pick up 1.5% to 258.5p on first-half results — only a modest gain on the day, but we’ve seen a 14% rise since a trading update on 17 July.
Revenue was flat, but the UK’s second largest estate agency saw its underlying operating profit rise by 37%, with an operating margin growing from 7.5% to 10.2%.
Adjusted earnings per share came in 34% ahead, and net bank debt was slashed by 49% to £31.7m. The interim dividend was held at 4p per share.
Investors have been shunning LSL due to fears that a weakening property market will put further pressure on its dividend — last year’s was cut by 18%, but it was still well covered by both adjusted earnings per share and by cash flow, even if both did fall from 2015 levels.
Ignore the short term
We are likely to see house sales falls this year, but chief executive Ian Crabb reckons that “mortgage costs and availability remain positive and the medium-to-longer term fundamentals of the UK housing market remain robust.“
Taking into account this short-term pessimism, I can’t help feeling LSL shares are oversold. A forecast drop in EPS this year would give us a forward P/E of only 9.6, and that would drop to 9.4 based on a modest EPS recovery pencilled in for 2018.
Last year’s dividend, if maintained, would yield 4.1% — and even if we saw a further reduction, I still don’t see the justification for such a low P/E multiple. I think LSL shares are cheap.
