Investment Summary
 

1. RWS Holdings provides an excellent service with a decent market share in its all operating divisions.

2. The company has access to attractive, large and growing end markets with fragmented service provision.

3. The Group has a diversified, international blue-chip client base.

4. It has a strong track record of revenue, profit and dividend growth.

5. The company has a good financial position which would create value for its shareholders in the long term.
 

Business Overview

RWS Holdings Plc (LON: RWS) is a Support Service company, providing services related to localization and translation, life sciences language services and intellectual property support solutions. The company developed 4 businesses through strategic acquisitions and organic growth, which includes language services, search, patent filing, and providing translation.  The company is having an employee base of around 2,000 professionals across Europe, Oceania, Asia, South America and North America.

Key Statistics



Top Shareholders


Source: Thomson Reuters

Glance at the Company
 

(Source: Preliminary Presentation, Company Website)

The company has translated more than 90,000 patents and IP documents. It has more than 86,600 life science projects and it has translated more than 1.5 billion words.

Business Objective

The company’s objective is to provide superior Intellectual Property (IP) and language services that would meet the needs of its clients. It supports the customers of its four divisions and their business performance through its services. It focuses on delivering quality solutions and ensuring the effectiveness of all key business and production processes.

Specialist Divisions


(Source: Preliminary Presentation, Company Website)

The company has made its specialist divisions through focused integration and acquisitions. The Group has made long term relationships with its clients and addresses large and growing markets with its fragmented services and growth drivers.

Growth Drivers
 

1. The growing demand for language services driven by globalization and international trade.

2. The growth in digital content generated internationally and requiring quality localization.

3. The Group's use of technology that enables RWS to provide customers with a world class services.

4. The Group's ability to attract new clients by its leading position and reputation in an otherwise highly fragmented sector.

5. The company's ability to expand in new or existing but growing geographies.

6. An increase in cross divisional selling of the Group's suite of services.
 

Revenue Segmentation




(Source: Preliminary Presentation, Company Website)

Patent Translation & Filing forms the major part of the total revenue of the company. It accounted for 44 per cent in FY2019, followed by Moravia (31 per cent) and Life Sciences (24 per cent).

Business Strategy

(Source: Preliminary Presentation, Company Website)

Global Presence


(Source: Preliminary Presentation, Company Website)

Outlook - FY2020
 

1. The Group has a well-balanced and integrated business with extensive service offerings.

2. Its divisions are well placed to take advantage of opportunities in their growing markets.

3. The company has an excellent pipeline of new clients.

4. The Group has a strong balance sheet and minimal net debt which would boost its growth.
 

Recent News

On 18^th March 2020, the company announced that a total of 223,105 options to subscribe for ordinary shares of 1p each following the company's share option plan, had been exercised by a Senior Manager of the company on 17 February 2020. Following this exercise, there are a further 152,635 vested options outstanding under the company's unapproved option scheme.

Financial Highlights - FY2019


(Source: Preliminary Report, Company Website)

For the financial year ending 30th September 2019, the company’s revenue was up by 16 per cent to £355.7 million as against £306 million in FY2018. The increase in the revenue was driven by an increase in demand for localization services for the period. The company’s adjusted operating profit stood at £78.4 million in FY2019 against an adjusted operating profit of £66.3 million in FY2018. The company’s adjusted PBT (profit before tax) surged by 20 per cent to £74.2 million in FY2019 against adjusted PBT (profit before tax) of £61.8 million in FY2018. The company’s reported PBT (profit before tax) surged by 45 per cent to £57.7 million in FY2019 against reported PBT (profit before tax) of £39.7 million in FY2018. The company’s adjusted earnings per share for FY2019 was up by 22 per cent to 21.3 pence versus adjusted earnings per share of 17.4 pence in FY2018. The company’s reported basic earnings per share for FY2019 was up by 59 per cent to 16.5 pence versus reported basic earnings per share of 10.4 pence in FY2018. The total dividend was up by 17 per cent to 8.75 pence in FY2019 from 7.5 pence in FY2018. The company’s net debt reduced by 43 per cent to £36.8 million for the period.

Key Performing Indicators

Revenue


(Source: Preliminary Presentation, Company Website)

The company’s revenue increased to GBP 355.7 million in the FY2019 as compared to GBP 27.3 million in the FY2003. Compounded Annual Growth Rate stood at around 22 per cent.

Adjusted PBT


(Source: Preliminary Presentation, Company Website)

The company’s adjusted PBT increased to GBP 74.2 million in the FY2019 as compared to GBP 5.6 million in the FY2003. Compounded Annual Growth Rate stood at around 17.5 per cent.

Financial Ratios

 

The reported EBITDA margin in FY19 was 23.60 per cent against the industry median of 18.70%. The reported operating margin was 17.40 per cent for the FY19. Net margin reported was 12.7 per cent for the fiscal year 2019, higher from the industry median of 7%. Return on equity for the same period stood at 12 per cent. On the liquidity front, RWS Holdings Plc’s current ratio stood at 1.47x. On leverage front, the debt-equity ratio of the RWS Holdings Plc’s was 0.21 i.e. the company is less leveraged than the industry with debt-equity ratio of 0.61.

Share Price Performance


Daily Chart as on 31^stMarch 2020, before the market closed (Source: Thomson Reuters)

On March 31, 2020, at the time of writing (before the market close, at 9:33 AM GMT), RWS Holdings Plc shares were trading at GBX 460, up by 1.10 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 674/GBX 399.71. The group’s stock is reflecting lower volatility as against the benchmark index based on the company’s beta of 0.9743. The outstanding market capitalisation was around £1.25 billion.

From the technical standpoint, 14 days-Relative Strength Index of the stock is strengthening the upside move.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)



To compare RWS Holdings Plc with its peers, Price/Earnings multiple has been used. The peers are HomeServe Plc (NTM Price/Earnings was 22.55), Knights Group Holdings Plc (NTM Price/Earnings was 16.55) and Keystone Law Group Plc (NTM Price/Earnings was 25.95). The median of Price/Earnings (NTM) of the company’s peers was 22.55x (approx.)

Method 2: Price to Cash Flow Approach (NTM)



To compare RWS Holdings Plc with its peers, Price/Cash Flow multiple has been used. The peers are HomeServe Plc (NTM Price/Cash Flow was 19.41), Knights Group Holdings Plc (NTM Price/Cash Flow was 22.74) and Keystone Law Group Plc (NTM Price/Cash Flow was 25.51). The median of Price/Cash Flow (NTM) of the company’s peers was 22.74x (approx.)

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the company’s P/B multiple was 3.6x, which was lower as compared with the industry, which shows that the company is underpriced than the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

RWS Holdings V/S FTSE-AIM 100 Price – 1 Year


(Source: Thomson Reuters)

In the last one year, RWS Holdings Plc share price has declined 5.70 per cent as compared to 29.20 per cent decline of FTSE-AIM 100 index, which shows that the stock has outperformed the index during the last one year.

Dividend Yield


(Source: Thomson Reuters)

RWS Holdings Plc has a dividend yield of 1.92 per cent, which is lower than the industry dividend yield of 2.49 per cent but higher than the sector dividend yield of 1.54 per cent.

RWS Holdings V/S Industry V/S Sector – 1 year


(Source: Thomson Reuters)

In the last one year, RWS Holdings Plc share price declined by 5.6 per cent which is lower than the industry decline rate of 12.3 per cent and sector decline of19.75 per cent.

RWS Holdings Total return- 1 year


(Source: Thomson Reuters)

In the last one year, RWS Holdings Plc has delivered a total return of negative 4.25 per cent, while the FTSE All share index has delivered a total return of negative 20.18 per cent.

Growth and Risk Assessments

There are certain risks which are associated with the company’s business. These includes maintaining the quality of the Group's services, fluctuation in foreign exchange rates, regulatory changes to patent translation requirements in Europe, the emergence of new translation technologies and the failure to successfully integrate acquired businesses into RWS. The risk of Brexit could also impact the business of the Group. However, the Group has a well-balanced and integrated business model and an extensive service offering which could benefit the company’s business. It has a global presence which would diversify its market risks. It has a strong platform through which it could tap on the opportunities across new and existing clients. The financial year 2020 had begun in line with the company’s expectations. Its three main divisions are well positioned to take advantage of the excellent opportunities in their growing markets. The Group has a strong balance sheet with minimum net debt, which positions it well for the sustainable growth and developments.

Conclusion

The company has reported a decent financial performance in the fiscal year 2019. At the recent AIM Awards, RWS had won “Company of the Year” award, which showed its growth prospects. Its three main divisions delivered record performances. The Group had strengthened its specialist legal and financial translation offering through the acquisition of Alpha Translations Canada Inc. The Group has secured its position as one of the world's leading providers of language services and is taking advantage of the many opportunities provided by extensive service offerings, broadened client base, expanded global presence and the demand for specialist intellectual property, life sciences and localization services. Its strong balance sheet ensures that it is well positioned in the long term.

Based on decent fundamental prospects and support from valuation done using the above two methods, we have given a “Speculative Buy” recommendation at the current price of GBX 450.50 (as on 31st March 2020, before the market close at 11:39 AM GMT) with lower double-digit upside potential based on 22.55x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 22.74x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.). Speculative Buy stance is given because of the risks and uncertainties mentioned above could affect the business performance of RWS Holdings in the short term.
 
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.

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