RWS Holdings PLC (LON: RWS) – New financial year has begun positively, ahead of the management expectations.

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 divisions - 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 the 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 22 April 2021, RWS expects to release its half-yearly trading statement.

(Source: Presentation, Company Website)

Growth Prospects and Risk Assessment

RWS has a leading position in intellectual property support solutions, localization, and life science language services. It has attractive and growing end markets, providing opportunities to gain market share. Moreover, it has attractive and sustainable margins with consistent delivery of earnings growth, which is underpinned by the 16-year track record of constant growth in annual revenue and annual adjusted PBT. Going forward, the acquisition of Iconic and Webdunia shall provide access to award-winning niche machine translation and localization offering in the Indian and Asia Pacific markets, respectively. Moreover, 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.

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 by 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.

(Source: Presentation, Company Website)

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.

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

Recent Developments

On 24 February 2021: The Company stated that Ocorian Limited, acting as a trustee of the RWS Employee Benefit Trust, had purchased ordinary shares of 55,896 at an average price of 637.43 pence per share.

On 23 February 2021: RWS had awarded 4,574 share options under Save as you Earn (SAYE) scheme at a price of £4.72 and expected to mature on 1 April 2024.

On 16 February 2021: The Company had issued new shares with an increase of 0.04% in the number of shares.

A Glimpse of Business Segments (FY20)

AGM Update (as on 10 February 2021)

• The Company delivered excellent Q1 FY21 results, with good revenue growth and a significant double-digit percentage increase in adjusted profit before tax.
• SDL Plc (acquired business in November 2020) performance for the year ended 31 December 2020 was in line with market expectations.
• RWS witnessed a strong balance sheet, with no net debt.
• Therefore, the Company is well-positioned to take advantage of further acquisition opportunities in a rapidly consolidating market segment.

Financial and Operational Highlights (for the year ended 30 September 2020 (FY20), as on 10 December 2020)

(Source: Company Website)

• For FY20, the Company delivered a resilient performance and was in line with market expectations.
• The total revenue surged by 0.02% year-on-year (YoY), with good growth across Life Sciences and Moravia divisions.
• In terms of divisional revenues, RWS Moravia recorded revenue increased by 5.1% YoY; RWS Life Sciences also experienced increased demand for their services and increased by 6% YoY; RWS IP Services revenues reduced by 10% YoY.
• During the period, the adjusted profit before tax decreased by 5.5% YoY, due to the slightly lower gross margin.
• Basic earnings per share increased by 2.4% YoY in FY20, while adjusted basic earnings per share decreased to 19.9 pence compared with the previous year.
• In 2020, the Company successfully integrated the two acquisitions, namely Iconic Translation Machines and Webdunia.
• 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.
• The Company witnessed a strong balance sheet, reduced net debt and improved its cash conversion rate.
• The Board has recommended a final dividend per share of 7.25 pence, an increase of 3.6% as compared with the previous year (2019: 7 pence).
• At the end of 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.
• Further, the new financial year has begun positively and is slightly ahead of the expectations.
• Major transformation programme is underway to drive improved efficiency in FY22 and beyond.
• The merger with SDL gives an unrivalled opportunity to the Group and also provide an extensive blue-chip client base.
• Moreover, joint-sell and cross-sell opportunities makes a promising pipeline for growth.

Financial Ratios (FY2020)

Share Price Performance Analysis

On 16 March 2021 (before the market close at 8.15 AM GMT), RWS Holdings’ shares were trading at GBX 625.00, down by 0.64% against the previous day closing price. Stock 52-week High and Low were GBX 767.00 and GBX 399.71, respectively.

From the perspectives of technical indicators, 50-day SMA (594.52) and 100-day EMA (593.29) are currently supporting an upside move, which means the stock price could increase in the short term.

In the past three months, RWS Holdings’ stock return has outperformed the benchmark index and the sector as it has delivered a return of around +14.36% as compared to around +9.10% return of FTSE AIM UK 50 index and nearly +5.19% return of FTSE All-Share Support Services index.

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

Business Outlook

FY21 has started positively and slightly ahead of the management expectations as the Group adjusted well to the remote working environment. Moreover, the Company has no debt following the acquisition of SDL. Furthermore, the Group expects to receive synergy benefits of over £15 million through the SDL’s acquisitions over the coming 12-18 months. In a nutshell, RWS has a solid pipeline of bolt-on acquisition opportunities. 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. 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, robust H2 performance, a strong start to FY21 activities, stronger levels of activity in Life Sciences and Moravia, decent operating & financial performance, high level of cash generation capabilities, robust balance sheet position, 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 625.00 (as on 16 March 2021, before the market close at 8:15 AM GMT), with lower-double digit upside potential based on 35.21x Price/NTM Earnings (approx.) on FY21E 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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