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SDL upgraded to 'buy' at Citi as it expects further operational improvements this year

SDL's 2017 results were affected by weak gross margins in Language Services in the first half and by software deal slippage towards the end of the period
Statue of a bull
Citi has turned bullish on SDL, though the price target remains unchanged

Citigroup is starting to see value in the turnaround story at SDL PLC (LON:SDL), the language translation technology firm.

The US banking giant has upgraded the stock to ‘buy’, explaining that an earnings multiple of 16.2, based on its projected earnings for fiscal 2019, is “undemanding, given the earnings upside opportunity”.

FY17 a year of stabilisation

Citi still has concerns about the complexity and timing of the turnaround, but 2018 should see the firm make further operational improvements while the year-on-year comparatives should provide a soft benchmark to beat, given the poor result in 2017.

Earlier this week, SDL reported it had made an adjusted profit before tax of £22.0mln in 2017, down from £27.0mln the year before.

“FY17 was a year of stabilisation and while we still believe it will take time to turn the business around, the operational metrics we follow appear to have bottomed out,” Citi declared.

Citi also sees plenty of scope to cut the fat from SDL’s overhead cost base, which forms about 44.5% of annual revenues.

The shares were up 14p at 400p following Citi’s note; the US finance house has an unchanged price target for the stock of 490p.

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