Silver Dell: Forecasts Adjusted To Reflect UK Market Conditions

Silverdell (SID>AIM) has a medium-term target of 15% revenue growth. However, with its current funding capability the company will be restricted to achieving closer to 7-8% growth. If it is able to raise further funds it could exploit more of the ample opportunities open to it, which suggests investors should see any future capital raising as a positive step and not as a sign of a company in distress.

Overhang from potential funding requirement
The Silverdell equity story is one of potential growth. With its current capital structure the company is capable of sustaining 7-8% revenue growth. In order to achieve its medium-term target of 15% revenue growth it will need funds to support its working capital requirements. We estimate that £15-20m would be an ideal fund-raising target. Unfortunately the market seems to have discounted the price in anticipation of such a corporate action. Should a capital raising happen it will give an opportunity for new funds to invest in Silverdell in size.

Forecasts adjusted to reflect UK market conditions
We have reduced our forecasts to reflect the weak UK market. The problem is not a lack of work or opportunities, but rather that the decision making process for large contracts seems to be extending. This is reflected in the order book, which has contracted only very slightly to £210m, while the pipeline of potential business is still a further £200m in size. The operational gearing of the business means that the 1.2% decrease in forecast 2013 revenues results in a 15% decrease in forecast EPS. Should Silverdell succeed in raising funds the additional growth potential for the year to September 2014 and onwards would cause us to revert estimates back to, and possibly above, levels forecast before this downgrade.

Valuation: Attractive following share price weakness
Silverdell’s share price has dropped from 20p/share at the beginning of March to 16p. At current levels the 9.4x earnings multiple and 4.4x EV/EBITDA (against a historic trading multiple of 6x EBITDA) looks attractive. Our DCF, using revised forecasts, suggests 20p/share as a fair value – down from 23p/share. The value of Silverdell is a function of its growth, and with so much opportunity, there is potential for considerable upside should the UK market conditions improve or if the company resolves the growth limitations imposed by its cash constraints.

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