Anything to do with software technology can scare away more conservative investors, but it’s an area where margins are often high, and where great growth candidates can be found. Here are two that impress me.
Language support
Shares in language translation software and services specialist SDL (LSE: SDL) have doubled since September 2013, rising to 501p at the time of 2016 results day.
A “new strategy, structure and branding” has been happening, including the disposal of non-core businesses, and that’s almost done now, with just the tail-end still ongoing.
With resulting one-off items of £13.1m, SDL recorded a pre-tax loss of £15.8m. That’s better than the £25.2m loss a year previously, and continuing operations swung to a pre-tax profit of £11m (with an adjusted PBTA figure of £27m).
Adjusted EPS from continuing operations climbed from 21.17p in 2015 to 26.58p, and the total dividend was doubled to 6.2p per share, with the firm announcing a new progressive policy. On today’s share price that’s a yield of only 1.2%. But chief executive Adolfo Hernandez said the board “remains confident of another year of profitable growth which is reflected in the proposed realignment of our dividend,” and the City will need to upgrade its forecasts now.
There are a few things that impress me about SDL, including the firm’s improving margins and the fact that its software and services are used by a very wide range of clients — we heard that no single customer accounts for more than 5% of total revenue, and that customer acquisition among leading international brands is progressing well.
Forecasts suggest a P/E of 16.5 by 2018, and while that’s high enough to suggest confidence is growing in the firm, it’s low enough for me to think it’s still good value. If EPS growth is maintained over the next few years, I can see the well-covered dividend ramping up attractively. I reckon there’s a good future here.
Software quality
You might not be too familiar with SQS Software Quality Systems (LSE: SQS) — it’s a Cologne-based “specialist in end-to-end software and business process quality solutions” with a listing on AIM.
The big question is why did its shares plunge by 12% on Tuesday? The reason must be down to full-year results for 2016 just released, even though they look good, with chief executive Diederik Vos speaking of “another strong year” and telling us “we enter 2017 with confidence.“
Perhaps Herr Vos’s suggestion that he expects “growth of the overall US market to be relatively subdued following recent policy changes such as on health insurance” dented confidence. But he did enthuse that “we expect to see growth particularly in the German speaking countries, the UK, Ireland and Italy.” Maybe there’s some Brexit fear, too.
But a 17.2% rise in adjusted pre-tax profit and a 19.7% gain in adjusted EPS make me feel that the company’s enviable track record of growth is set to continue. And strong operating cash flow suggests the dividend, with a currently modest 2% yield but progressive, will continue to strengthen.
Net debt rose due to acquisition, though it’s been dropping nicely since the halfway stage and I see no cause for concern.
What really encourages me about SQS is that its shares have consistently offered low PEG ratings, and two more years on 0.8 and 0.9, respectively, make me think there’s more to come for a good few years yet.