Investment Column: SDL can translate into attractive returns

UK Coal; Stanley Gibbons
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The Independent Online

Our view: buy

Share price: 627p (+9.5p)

SDL is a company that makes sure things do not get lost in translation, and with a market cap of nearly £500m has become a significant player in the UK software industry. The company, which develops technology and offers support services to manage its clients' content across the world, yesterday put out an upbeat trading statement and announced a significant shift at the top of the company.

The update, in which SDL said it expected to beat analysts' estimates on revenues and profits by some 5 per cent, pleased investors. Revenues for the financial year are also expected to come in at £202.5m, up from £171.9m in 2009. Pre-tax profits will be in the range of £34.5m to £35.5m, up from £29.8m a year earlier.

Mark Lancaster, the group's founder, said the results came against a "difficult global environment", and the company was looking good for future growth. He also announced his move from chairman and chief executive to executive chairman, with chief financial officer John Hunter becoming new chief executive. Investec analyst Gareth Evans called it a "logical step" to free up Mr Lancaster to concentrate on strategic issues.

SDL has been looking beyond simple translation and wants to provide customers with a service that deals with everything from brand awareness to sales and after-sales support. Mr Hunter yesterday talked about continuing this "end-to-end" strategy that has seen significant contract wins including Saab, United Airlines, Fidelity Investments and LG.

SDL has performed strongly in the past year, particularly in critical emerging markets such as China and South Korea, as well as Japan and North America. At 19.6 times estimated 2010 earnings, the company is at a slight premium when compared with its peers. But quality doesn't often come cheap, so buy.

UK Coal

Our view: Speculative buy

Share price: 52p (-3.25p)

The financial crisis was hard on miners. Share prices fell as commodities slid in line with industrial demand. Traders scurried to find cover, bruising stocks in a number of companies – including UK Coal. Its shares went from above 500p in May 2008 to around 45p in November that year.

While they came back a bit in early 2009, the shares remain well below pre-crisis highs. At less than 60p, they are much closer to the nadir than the peak. On the surface, such an uninspiring recovery may be seen as an augury of further woes. But we view it as an opportunity. To be sure, the company has issues, not least a load of debt. Then there is a chunky property revaluation loss – besides mining, UK Coal has vast property holdings – of around £30m, which came to light in last night's trading statement.

Stacked against that are coal market fundamentals. Spot prices have been on the up, and are forecast to rise further. They are significantly higher than UK Coal's contracted levels. But analysts expect the company to start benefiting from a new contract pricing system this year, giving greater exposure to the spot price.

If UK Coal can keep production problems at bay, this stock may mount a real recovery. At less than 11 times forecast earnings for this year, they look cheap. A good speculative buy.

Stanley Gibbons

Our view: buy

Share price: 175.5p (+3.5p)

Stanley Gibbons, the stamp-collecting and memorabilia company, is likely to be celebrating more than most at the Royal Wedding this year, following its acquisition of the Benham Collectibles business in September.

The company expects the royal event to help lift Benham's revenues by as much as 40 per cent in 2011, citing how the business should benefit from sales of "associated first-day covers and the other commemorative collectible products". All this and profits for the year to 31 December 2010, which will be in line with expectations.

But shares in Stanley Gibbons, despite touching a 12-month high yesterday, still trade on a multiple of just 9.6 time forecast earnings, cheap for a defensive stock with a progressive dividend policy. Stanley Gibbons also believes there are "substantial opportunities" to lift overall sales and profits in 2011 and beyond via initiatives including the introduction of an Amazon-style community website.

It is also developing trading relationships in China, which has an estimated 30 million collectors. If Kate doesn't leave Wills at the altar, long-term happiness for investors beckons. Buy.