RWS Holdings PLC (LON: RWS) – Dominant position in growing market segments.

Established in the year 1958, RWS Holdings PLC is a FTSE AIM UK 50 Index listed Company, which is involved in intellectual property (IP) support services, patent translations, linguistic validation services, localization, and technical and commercial translations. It operates through three business segments - RWS IP Services, RWS Life Sciences, and RWS Moravia. The RWS IP Services segment provides patent translations and filing solutions. The RWS Life Sciences segment caters to technical translations and linguistic validation for the life sciences industry. The RWS Moravia segment provides the adaptation of applications, software, content, marketing material, websites, and audio or video. The RWS Language Solutions division (which is a part of RWS Moravia segment after 1 October 2019) deals in commercial translation and interpreting services. The Company is headquartered in the UK and employs over 2,000 people in Europe, South America, North America, Asia, and Oceania.

On 10 December 2020, the Company is expected to release the final results for FY20.

16-Year Track Record of Delivering Sustainable Growth

(Source: Kalkine Research, Company Report)

Key Fundamental Statistics

Industry Outlook Dynamics

As per the Deloitte, 2019 Global Life Sciences Outlook, the Life Sciences industry is projected to reach US$10 trillion in market size by 2022. The short-term outlook is uncertain, but the market is likely to grow at a faster rate in a post Covd-19 world. Adjacently, according to the report from Verified Market Research, the language translation services market was valued at US$39.61 Billion in 2019 and forecasted to reach US$46.21 Billion by 2027, representing a CAGR of 2.1% from 2019 to 2027. The industry growth is driven by the following growth drivers: globalisation and international trade are growing the demand for language services, increasing world patent filing services, increasing requirement for the development of new drugs and vaccines, and growth in digital content globally.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

RWS can attract new client with its market-leading position in the fragmented sector. It can also expand the business in new geographies with international reputation. It can also explore new opportunities with cross-divisional and joint-selling services. Whilst the primary focus is on organic growth, the recent acquisitions and driving synergies would further accelerate growth. Further, it has a dominant position in intellectual property support and language services to deliver above industry average levels of profitability.

 (Source: Presentation, Company Website)

However, there are certain risk and uncertainties to business growth. The Covid-19 pandemic could significantly delay patent filings and disrupt the demand patterns across divisions. The Brexit uncertainties can affect the ability to attract or retain the right talent. Further, there are financial risks arising from the insufficient capital availability, financial loss of customers, and fluctuating exchange and interest rates. 

(Source: Presentation, Company Website)

A Glimpse of Business Segments

The image below depicts the financial highlights of the three reportable segments:

(Source: Company Website)

Key Recent Developments

• 9 June 2020: RWS announced the acquisition of Iconic Translation Machines, Ltd (provider of neural machine translation (NMT) solutions) for a total consideration of US$21.0 million.
• 1 April 2020: The Company launched an online study and helping the global research community to assist pharmaceutical entities working on COVID-19 vaccines or treatments.

Key Shareholders Statistics

Financial & Operational Highlights – H1 FY2020 (31 March 2020)

(Source: Interim Report, Company Website)

• In the first half of the financial year 2020, the Company delivered strong performance despite challenging headwinds, with a decent performance from Life Sciences and Moravia businesses.
• The Company win new clients in IP Services business and is awaiting onboarding in H2 FY2020.
• RWS managed to reduce net debt substantially by 46% with a strong cash position of £28.3 million.
• The Company managed an interim dividend at 2019 level, reflecting confidence in the future prospects.
• The Company acquired Iconic Translation Machines and Webdunia.com to improve operational performance and expand global reach.
• RWS Holdings remained focused on the safety of staff globally, and all businesses were fully operational.
• The Company witnessed a limited impact of covid-19 on customer demand and has taken measures to reduce capital expenditure and preserve cash.
• The Company managed to maintain strong liquidity and generate cash during an uncertain period. As on 31 March 2020, the Company has a banking facility of US$200 million.
• At present, RWS is in no position to provide and guidance for FY2020.
• Despite the covid-19 crisis, the performance in the second half of FY2020 remained strong, with benefits from new contract wins, expected sales ramp up and strong sales pipeline.
• The trading performance since March 2020 remained good and delivered robust results in April and higher sales in May.

Financial Ratios – Decent Profitability Margins and Liquidity Profile versus the Industry Median

Reported profitability metrics for the H1 financial year 2020 stood higher than the industry median, reflecting higher revenue generated and better control over expenses as compared to the industry. On the liquidity front, RWS Holdings Plc’s current ratio was higher than the industry median of 1.45x, reflecting sufficient liquidity to meet short-term obligations. On leverage front, the debt-equity ratio was 0.22x, which was lower as compared to the industry median of 0.89x, reflecting that the company is less leveraged as compared to the industry.  

Share Price Performance Analysis

Daily Chart as on 15 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

On 15 September 2020 (before the market close, at 2:00 PM GMT+1), RWS Holdings Plc shares were trading at GBX 598.00, down by 1.32% against the previous day closing price. Stock 52-week High was GBX 767.00 and Low of GBX 399.71, respectively.

From the technical standpoint, shares were trading well above the short-term support level of 200-day (GBX 592) simple moving average prices, which reflects an uptrend in the stock.

14-day RSI is currently supporting the upward movement (~26 level), which means there is a good potential for a short term rebound in the stock price.

RWS Holdings Plc Vs FTSE-AIM Index (1 Year)

(Source: Refinitiv, Thomson Reuters)

In the last one year, RWS Holdings Plc share price has delivered ~9.93 per cent return as compared to ~7.81 per cent return of FTSE-AIM index, which shows that the stock has outperformed the index during the last one year.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

The trading performance during H1 FY20 was good with strong sales in April and May 2020. Given the evolving uncertainties, the Company refrained from providing any financial guidance for FY20. However, it was anticipating incremental ramp up in sales across all divisions from new clients and contracts win. Moreover, joint-sell and cross-sell opportunities makes a promising pipeline for growth. The Company is currently focusing on Life Sciences and technology customers, who are likely to be beneficiaries in a post-Covid-19 world.

Furthermore, the acquisition of Iconic Translation Machines will strengthen business with award-winning machine translation and artificial intelligence solutions. Also, the acquisition of Webdunia.com (India) Private Limited would support technology customers in the Indian and Asian Pacific regions. At the end of H1 FY20, the Company had a robust liquidity position and cash generation, which put RWS in a strong position to withstand the uncertain period and explore new opportunities in the future.

(Source: Presentation, Company Website)

 Over the course of 4 years (FY15 - FY19), the Company’s revenue surged from GBP 95.22 million in FY15 to GBP 355.7 million in FY19. Compounded annual growth rate (CAGR) stood at 39.02 per cent.

Based on the decent financial performance, strength of pipeline and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation for RWS Holdings Plc at the current price of GBX 598.00 (as on 15 September 2020, before the market close at 2:00 PM GMT+1), with lower-double-digit upside potential based on 33.63x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.). 

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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