RWS Holdings PLC (LON: RWS) – Solid H1 FY2021 performance and integration progressing well

RWS Holdings PLC is an FTSE AIM All-Share Index listed Company founded in 1958 and headquartered in Chalfont St Peter, the United Kingdom. The Company is a leading provider of technology-enabled language, content management and intellectual property services. The Company has four broader business divisions - RWS IP Services, RWS Regulated Industries, RWS Language Services and RWS Language Content and Technology. The key customers include 90 of the top 100 brands worldwide, top 10 pharmaceutical companies and top 20 patent filers globally. The IP Services is the World’s premier provider of patent translation. The Regulated Industries has highly specialised translations and linguistic validation for clients. Language Services is the World’s largest language services provider. The Language Content and Technology provides the latest innovations in language and content technologies. 

Recent Trend of dividend payments – RWS declared an interim dividend of GBX 2.00 per share for H1 FY2021 on 8 June 2021 with an ex-dividend date of 24 June 2021. The dividend would be paid on 16 July 2021. Previously, the Company had paid a final dividend of GBX 7.25 per share for FY2020.

Growth Drivers

• Enhanced customer proposition: The Company has combined its specialist expertise in language and content technologies with its acquired SDL’s language technology expertise. The acquisition of SDL Plc made RWS the largest provider of language services and language technology in the world.
• The capability, scale, and reach to serve the largest global companies: The Company serves 90 of the top 100 brands worldwide, top 10 pharmaceutical companies and 18 of the top 20 patent filers on a global level. Hence, it has strong growth prospects due to this customer reach.
• Well progressing integration: RWS strives to offer seamless delivery and focus on key value areas to clients. Hence, it is progressing to deliver a simplified group structure, where all four divisions would be supported by shared services. It would also ensure the focus on the key growth areas of value.
• Significantly enhanced cost synergies: RWS plans to deliver additional savings by September 2022 by rebranding SDL and Moravia and fully integrating them under the RWS brand. It strives to roll out the best of both and avoid any duplication. Hence, there could be efficiency and scale to achieve a competitive advantage.
• Accelerating use of technology: RWS plans to accelerate its usage of new technology and innovation. It places RWS in a unique position to capitalise on new opportunities and drive its growth.
  

(Source: Company Presentation)

Key Risks 

• Failure to achieve desired synergy benefits: Failure to achieve the desired synergy from the SDL acquisition could lead to a lack of cost savings as well as extra restructuring costs. It could affect the future margins of RWS.
• Emergence of disruptive technologies: RWS uses translation technologies such as translation memory. The emergence of disruptive technologies such as Neural Machine Translation and other technologies could pose a significant risk to RWS.
• Disruption in many regions: The Company operates in a global economy, and hence, there are disruption challenges in many regions due to Covid-19.
• Financial Risk: RWS has increased the dividends in H1 FY2021. It could affect its liquidity. Also, RWS has international operations. Hence, fluctuations in exchange rates could impact the financials.
• Change in CEO: RWS has recently announced the departure of Richard Thompson as the CEO and the appointment of Ian El-Mokadem as the new CEO effective 19 July 2021. The change in CEO could affect the strategy of RWS.
  

Now, we will analyze some key fundamental and shareholders statistics of RWS Holdings PLC.

Recent Development 

8 June 2021: On 8 June 2021, RWS announced the departure of Richard Thompson as the CEO and the appointment of Ian El-Mokadem as the new CEO effective 19 July 2021..

Financial and Operational Highlights (for the six months ended 31 March 2021 as of 8 June 2021)

(Source: LSE Website)

• Despite forex headwinds, RWS’ performance in H1 FY2021 was helped by the acquisition of SDL Plc on 4 November 2020. RWS’s revenue was up 92% YoY.
• It led to gross profit being up YoY by ~122.6% in H1 FY2021, reaching £146.4 million.
• However, administrative expenses rose significantly by ~205% YoY in H1 FY2021, which resulted in the decline in operating profit by ~1.9% YoY.
• There were significant cost synergies of at least £33 million, with adjusted EPS up 12% YoY in H1 FY2021.
• RWS’s cash accretive operations resulted in net cash surging £46.3 million to reach £11.8 million in H1 FY2021.
• This strong liquidity position led the management to increase the interim dividend per share by 14% YoY to GBX 2.00.

Financial Ratios (H1 FY21)

 Share Price Performance Analysis

(Research done by Kalkine Group)

On 15 June 2021, at 10:45 AM GMT, RWS’s shares were trading at GBX 572.50, down by 1.29% against the previous day closing price. Stock 52-week High and Low were GBX 767.00 and GBX 513.00, respectively.

On a weekly chart, RWS's price is trading above an upward sloping trend line for more than a year and currently trading around trend line support level, indicating the possibility of an upward movement. The momentum indicator RSI (14-period) is trading at ~22.84 level and in the oversold zone. The MACD line is trading above the centreline, however, forming a negative crossover with the signal line.

In the last five years, RWS’s stock price has delivered an excellent positive return of ~165.14%. It has outperformed the FTSE All-Share Industrial Support Services index with a return of around 65.93% and the FTSE AIM All-Share index with a return of about 74.98%.

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

Business Outlook Scenario

RWS had a decent performance in H1 FY2021 and is expected to do well in H2 FY2021, helped by synergies from the SDL acquisition and recovery in the markets, especially in the US. Driven by the acquisition of SDL Plc, RWS became the largest provider of language services and language technology in the world. Due to globalization, there would be increasing demand for language services and technology, which could improve RWS’s margins. The Company has an enhanced customer proposition, the capacity, scale, and reach to serve the largest global companies, well-progressing integration of operations, significantly enhanced cost synergies from the SDL acquisition and accelerating use of technology going into H2 FY2021. RWS has very low leverage, with a debt/equity ratio of 0.10x, indicating financial flexibility to raise further debt, if required, at a cheaper cost. It will help RWS to significantly invest in its new technologies, product development, reaching out to new customers and customer value proposition. The management also has enough confidence in RWS’s prospects that it increased the interim dividend in H1 FY2021 by 14% YoY.

The board anticipates performance for FY2021 in line with expectations. On the technical chart, the next important support level is at GBX 499.00.

Based on the decent performance in H1 FY2021, expected synergy from SDL acquisition, decent growth prospects, better liquidity and leverage position of the Company than the industry, and support from valuation as done using the above method, we have given a “Speculative Buy” recommendation on RWS Holdings Plc at the current market price of GBX 572.50 (as on 15 June 2021 at 10.45 AM GMT), with a lower double-digit upside potential based on 24.61x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.). 

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV

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