RWS Holdings PLC (LON: RWS) – Sustainable business model and robust balance sheet

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 full-year results for FY20.

Growth Prospects and Risk Assessment

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. RWS can attract new clients with its market-leading position in the fragmented sector. It can also expand the business in new geographies with an international reputation. It can also explore new opportunities with cross-divisional and joint-selling services. Recently, RWS also launched an online study and helping the global research community to assist pharmaceutical entities working on COVID-19 vaccines or treatments.

The Company acquired Iconic Translation Machines and Webdunia.com to improve operational performance and expand global reach. The Company witnessed a limited impact of covid-19 on customer demand and has taken measures to reduce capital expenditure and preserve cash.

However, there are certain risks and uncertainties to business growth. There is a credit risk associated with the financial loss of customers and liquidity risk arising from fluctuating interest and exchange rates. The Covid-19 pandemic has also disrupted the customer demand pattern. Moreover, the inability to integrate the acquired business successfully can create inefficiencies. Furthermore, patent filings and demand for language support can be delayed or impacted with Brexit and Covid-19 uncertainties. Also, the emergence of new technologies can lead to a market share loss. Brexit can also affect the ability to attract and retain staff from the European Union.

Industry Outlook Dynamics

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. Adjacently, 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.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of RWS Holdings Plc.

Recent Developments

On 4 November 2020: The Company announced the appointment of three new Non-Executive Directors, namely David Clayton, Gordon Stuart and Frances Earl. Following the completion of the combination of RWS and SDL Plc, the Company announced the Board Changes. The Board will comprise - Andrew Brode, as Chairman; Richard Thompson, as CEO; Desmond Glass, as CFO; David Shrimpton, Senior Independent Director (who will not seek re-election at the AGM in 2021); Lara Boro, who will become Senior Independent Director after the 2021 AGM.

A Glimpse of Business Segments (H1 FY20)

(Souce: Company Website, created by Kalkine Group)

Year-End Trading Update (as on 20 October 2020)

• For FY20, the Company delivered a resilient performance and was in line with market expectations.
• The Group revenue was expected to be not less than £355 million in FY20.
• Also, the adjusted profit before tax was expected to be in line with market expectations.
• As reported trends in H1 FY20, the Company has experienced an increased demand for services within both the Moravia and Life Sciences divisions, due to the assistance in the clinical trials for new Covid-19 vaccines.
• The acquisitions with Iconic Machine Translations and Webdunia.com are performing well.
• The Company witnessed a strong cash generation, with net debt of £38 million (on an IFRS 16 basis) as at 30 September 2020.
• RWS Holdings has a robust platform with a strong global patent strategy.
• At present, RWS is not reinstating financial guidance due to ongoing market uncertainty.

Financial and Operational Highlights (for the six months to 31 March 2020 (H1 FY20), as on 9 June 2020)

(Source: Company Website)

• The Company delivered a robust performance in H1 FY20, with a good set of results in Moravia and Life Sciences divisions.
• Despite the Covid-19 crisis, the Company has started the strong second half of 2020, with a robust pipeline of opportunities.
• New clients onboarded for IP Services business; Moravia saw good results from several customers, and Life Sciences revenue increased by 2% year-on-year, driven by continued growth for the specialist, high-value linguistic validation offering.
• RWS Holdings witnessed a limited impact of Covid-19 on customer demand and has taken measures to reduce capital expenditure and preserve cash.
• The trading performance since March 2020 remained good and delivered robust results in April 2020 with higher sales in May 2020.
• RWS managed to maintain strong liquidity and cash position during the uncertain period. As on 31 March 2020, the Company has a banking facility of US$200 million.
• The Board has approved an interim dividend per share of 1.75 pence, which was maintained at the same level as in 2019.

Share Price Performance Analysis

On 17 November 2020 (before the market close, at 8.02 AM GMT), RWS Holdings’ shares were trading at GBX 571.16, down by 0.14% against the previous day closing price. Stock 52-week High was GBX 767.00 and Low of GBX 399.71, respectively. 20-day SMA (568.50) is currently supporting an upside move, which means the stock price could increase in the short term. Also, 14-day RSI is currently supporting the upward movement (around 43.46 level), which means there is a good potential for a short term rebound in the stock price.

In the last two years, RWS Holdings’ stock return has outperformed the benchmark index as it has delivered ~ 11.55% return as compared to ~2.38% return of FTSE AIM UK 50 index and underperformed against ~13.95% return of FTSE All Share General Industrials index.

In the last five years, RWS Holdings Plc share price has delivered around 210% return as compared to the approximately 44% return of FTSE AIM UK 50 index, which shows that the stock has outperformed the index during the last five years.

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

Business Outlook

The Company is currently focusing on Life Sciences and technology customers, who are likely to be beneficiaries in a post-Covid-19 world. Moreover, joint-sell and cross-sell opportunities makes a promising pipeline for growth. 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.  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. 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.

 (Source: Presentation, Company Website)

Considering the 16-year track record of sustainable growth in annual revenue and annual adjusted PBT, robust H1 performance, a strong start to H2, new business wins, stronger levels of activity in Life Sciences and Moravia, decent operating & financial performance, high level of cash generation capabilities, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on RWS Holdings at the current price of GBX 571.16 (as on 17 November 2020, before the market close at 8:02 AM GMT), with lower-double digit upside potential based on 35.74x Price/NTM Earnings (approx.) on FY20E earnings per share (approx.).

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

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

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