SDL

News of Broker upgrades from Investec and T & G following trading update:


19.12.06 broker upgrades followed a positive pre-close trading statement, dealers said. Investec's Gareth Evans is happy to reiterate his 'buy' recommendation, and has cranked up his year to Dec 2006 normalised pretax forecast by 10% to 10.7m, for EPS now of 11.6 pence. At this stage, the analyst is leaving his 2007 predictions -- he looks for 12.5m pretax -- unchanged, but says the bias is clearly positive. The key drivers behind the strong trading performance have been threefold, Evans told clients. Firstly, successful currency hedging mitigated 70% of the downward pressure SDL would otherwise have experienced as a result of the group's US dollar exposure. Secondly, the business experienced high levels of software sales, contributing higher margins than the traditional translation services. Finally, SDL has increased the use of its own software within its translation services, enabling it to improve greatly efficiencies of process and driving higher margins in this part of the business. On the analyst's new numbers, the stock trades on a P/E multiple for 2006 of 20.0 times, falling to 17.3 in 2007 and only 14.1 in 2008. Dollar exposure remains, but the emphasis is swinging from the dollar-exposed nature of the stock to the strength of core trading, Evans concluded. Over at Teather & Greenwood, Adam Lawson also reiterated his 'buy' stance on SDL. If he adjusts his 2007 estimates -- he is currently looking for pretax of 12.3m and EPS of 13.3 pence -- then it will probably only be to the tune of a few hundred thousand pounds, he said. Assuming that his new pretax number is closer to 12.6m, then this would yield EPS of around 13.5 pence, or a P/E multiple of 16.6 times. Lawson thinks that 20 times is fairer given the growth characteristics of this business and, therefore, has stepped up his target price to 270 pence.