Silverdell Strategy Update: New Medium-Term targets Are Ambitious

In December Silverdell ((SID.L)) issued new medium-term targets pointing to an acceleration in revenue growth and increased sustained EBITDA margins. We view these as ambitious, but achievable. Successful strategic execution would point to a higher quality and mix of earnings, which, accompanied by a promised dividend flow will enhance the share valuation.


2012 was a year of transformation
The year ending September 2012 was a milestone for Silverdell. The company doubled the size of its business through the acquisition of EDS. It also established a more supportive banking relationship with the HSBC bank than it had with Barclays. It has achieved most of its historic KPI targets, although revenue growth in Remediation was negative partly due to demand, timing, and we suspect, management having to focus on the integration of EDS.

New medium-term targets are ambitious
Management has laid out ambitious new medium-term targets founded on revenue growth of 15% pa and a sustainable EBITDA margin of 10% (7.5% in FY12). We believe these are a stretch, but achievable. The remediation division had a poor 2012 and will need to be returned to growth. These targets preclude material additional investment or acquisitions; if these were to occur, higher growth and eventual higher payback would be a possibility.

Valuation: Price factors in little success
Our base case forecast scenario is moderately negative in outlook, assuming just 2% revenue growth in the future. Even on this basis our DCF suggests a fair value of 23p a share. If management is successful in achieving its medium-term targets, then this would add 35% to our valuation of the company, at a fair value of 31p/share. On our base case forecasts the company trades at 9.9x earnings, within its 9-10x trading range, and on an EV/EBITDA of 4.8x, below its historic 6x range. This suggests that the market does not think the management will have success in hitting its targets.

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