One Industrial Stock to Punt on - RWS Holdings

RWS Holdings PLC

Established in the year 1958, RWS Holdings PLC is an 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.

Investment Rationale – SPECULATIVE BUY at GBX 340.65

• Acquisition Benefits: On 23 March 2022, RWS announced the acquisition of Liones Holding B.V. for €17.5 million, on a cash-and-debt-free basis. It would bolster the Company’s leadership position in the structured content market.
• Capital Market Event Update: On 23 March 2022, RWS announced that it has demonstrated a solid track record of revenue, profits, and dividend growth while maintaining excellent cash conversion since its floating in 2003. However, it expects to deliver growth and margin in FY22 towards the lower end of current market expectations due to the expected weakness in the IP Services’ performance amid geopolitical tensions arising from the Russia-Ukraine ware scenario. Notwithstanding, RWS expects to deliver organic growth, margin progression, and operational efficiency over the medium term.
• AGM Statement: On 23 February 2022, RWS affirmed that it had started FY22 well and trading in line with market expectations, supported by the strong performance from Language Services and Regulated Industries divisions.
• Strong Platform for Growth: RWS had shown a resilient business performance during FY21, supported by the successful integration of SDL. The Company achieved better-than-expected profitability during FY21, driven by significant contributions made from SDL.
• Operational Achievements: RWS aimed to drive sustainable organic growth from an efficient cost base with accelerated investments towards the expansion of scale, footprint, and capabilities for clients.
• Turnaround into Net Cash: RWS had witnessed a favorable turnaround from reporting net debt of £15.1 million during FY20 to reporting net cash of £45.3 million for FY21.
• Technical Indicator: From a technical standpoint, 14-day RSI (~24.85) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.

Key Risks

• Emerging Risk: In Russia and Ukraine, RWS has 88 and 55 employees, respectively. The ongoing war scenario can impact the operations of the European Patent Office and growth from Language Services.
• Gloomy Outlook: The year 2022 is expected to be the year of inflation, Central Bank tightening, cost inflation, subdued demand outlook, and wage pressure. All these factors can hurt the corporate profits and equity markets.

Financial and Operational Highlights (for the twelve months ended 30 September 2021, as of 14 December 2021)

(Source: Company result)

• Top-Line Business: The total revenue went up by 95% year-on-year during FY21, with good growth across all divisions and significant contributions made by the acquisition of SDL.
• Profitability: The adjusted profit before tax witnessed an increase of around 66% during FY21.

Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

*Peers: GlobalData PLC, HomeServe PLC, Essentra PLC, and Ricardo PLC.

*All selected peers are LSE-listed players from the Industrials sector.

Conclusion

RWS reported a robust financial performance in FY21, while the acquisition of SDL has positioned the Company as the global leader in language services and technology. Moreover, RWS can attract new clients with its market-leading position in the fragmented sector. It can also explore new opportunities with cross-divisional and joint-selling services. The image below shows the medium-term targets:

Based on the strong trading momentum, recent acquisitions, solid financials, and support from the 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 340.65 (as of 23 March 2022, at 10:55 AM GMT), with lower double-digit upside potential based 14.77 Price/Earnings (approx.) on FY22E Earnings Per Share (approx.).

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decisions should be made depending on the investors’ appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and is subject to the factors discussed above.

Note 3: Target Price refers to a price level that the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 4: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’

Note 5: Dividend Yield may vary as per the stock price movement.  

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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