SDL PLC – RWS will acquire the issued capital of SDL

SDL PLC (LON: SDL) is a FTSE All-Share listed Professional Services Company, which operates through four operating segments - Language Services, Language Technologies, Content Technologies, and Non-Core Businesses.

Valuation Rationale

1. Touched 52-week high today, and RSI-14 indicating an overbought signal, which means short-term correction is expected.

2. Following the combination, SDL PLC will only be holding nearly 29.5% of the combined entity. Moreover, the success of integration is uncertain. Hence, it is prudent to book profit now.

3. It has not been providing dividends for the past two quarters.

Sales declined in H1 FY20.  

Recent News

27 August 2020: SDL PLC and RWS Holdings PLC have reached an agreement for all-share combination. Pursuant to which, RWS will acquire the entire share capital of SDL at GBX 907, which represents a premium of 52% on GBX 598 (closing price of 26 August 2020). Immediately following the combination, the combined Company will be known as RWS, wherein SDL Shareholders will own approximately 29.5%.

Interim Results (for the six months ended 30 June 2020)


(Source: Company Website)

The major highlights of H1 FY20 results released on 11 August 2020, were as follows:

1. The Company delivered solid results with business continuity plans. Despite the decline in sales in Language Services division, gross margin improved to 43.5% (H1 FY19: 42.1%).

2. With improved cash management, the operating cash conversion stood at 144% (H1 FY19: 60%).

3. Liquidity as of 30 June 2020 stood at £98 million.

One Year Share Price Performance

 
1-Year Daily Chart as on 27 August 2020, before the market closed (Source: Refinitiv, Thomson Reuters)

 
Key Risks 

Due to Covid-19, there is a risk to customer spending, and there can be delays to the sales cycle. The Company had suspended the dividends in April 2020 and did not declare the same even in Q2 FY20. The software sales might remain subdued even in the H2 FY20. 

Conclusion – Take profits off the table

Despite the challenging period, the Company’s performance in the H1 FY20 was strong with improved profitability and earnings per share. Consequently, it has attracted the implied premium of 52% from RWS Holdings for the combined entity. This gives a lucrative opportunity to book profit and look for another set of catalysts in RWS once the integration is done. Moreover, there is uncertainty regarding the successful integration of two businesses, which could lead to inefficiency. Furthermore, the Company had already flagged a 14% (year-on-year) revenue decline in Translation Productivity in H1 FY20, and trading is uncertain even in H2 FY20 considering the evolving nature of Covid-19.

Stock's 52 weeks High is GBX 870.00 and Low is GBX 367.00. From the technical standpoint, 14-day RSI is currently close to the overbought zone, which means there is a likelihood for a short-term correction in the stock price.

Therefore, it is advisable to book profit now and reinvest the amount of principal and gains in the combined entity (RWS), provided it has growth or value opportunities.  

Based on the risks associated and factors discussed above, we have given a “Sell” recommendation on SDL PLC at the current price of GBX 865.20 (as on 27 August 2020, before the market close at 8.04 AM GMT+1). 

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