RWS Holdings: Translating Profit Into Increasing Dividends

24th Apr by Mark Simpson

17 comments 1548 reads

Summary

RWS Holdings (LON:RWS) is a mid-cap, AIM-listed provider of technical translation and search services.
With a StockRank of just 47, this won't appeal to quant investors. The Momentum Rank is 7, reflecting a weak share price and broker downgrades over the last year.
However, if current broker forecasts are to be belieived, the forward P/E is now 7 with a 8% yield, which will appeal to value and income investors, particularly as the company has a 20-year unbroken record of increasing its dividend payment.
On the surface, the company's quality metrics are uninspiring. However, this is partly due to how past acquisitions were accounted for. Going forward, these metrics will likely improve to reflect that this is a relatively capital-light business.
The large acquisitions the company made in 2017 and 2020 have generated scale but at the cost of margins, and this may well be a case of diworsification. However, these deals were done with equity, which was highly rated at the time, so the impact on investors in the business today is minimal.
Two market fears appear to be holding the share price back. The first is the implementation of the Unitary Patent in the EU, which reduces the need for technical translation. This has undoubtedly been a headwind, but one that has not significantly impacted the business. The second is the increased use of Artificial Intelligence for language translation. The company argues that they are at the forefront of this development and that AI represents an opportunity, not a headwind for the business. As with all new technologies, the reality is probably somewhere in the middle.
Despite these concerns, the current valuation appears compelling for what has historically been considered a high-quality business. However, difficult short-term trading and a lack of clarity over their ability to meet full year forecasts may mean that cautious investors will want to wait for evidence that the trend of broker downgrades ends before investing.

Profile

RWS Holdings (LON:RWS) is an AIM-listed provider of technical translation and search services. They ensure their client's IP is protected and available across the globe via over 65 locations on five continents. They have an extensive client network and work with over 80% of the world's top 100 brands, particularly pharmaceutical companies, investment banks, law firms and patent filers.

The company was created in 1982 from a merger between M.H. Randall & Partners, a business that translated…

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Epitychia

24th Apr

Excellent report and food for thought. Thank you. One other point is that it should be a good diversifier, it has risk but these risks are quite different from most other companies.

FREng

Thanks, Mark for an impressively detailed and balanced analysis of RWS Holdings (LON:RWS) .

JASVFS

Thank you for that Mark, very thorough and helpful. We hold but thankfully not a large holding, it is currently down about 40% although we have had those good dividends. I've learned to be wary of averaging down but we might stick with them.

JonBeddell

Excellent article Mark, thank you! It is indeed fascinating how sentiment swings. This one is on my deep value watchlist. As you say, some of Stocko’s market ratings are definitely undercooking the value on offer simply because U.K. stocks on many measures are so cheap.

mammyoko

Excellent balanced article, Mark

John LA

Thank you for your detailed analysis, I think RWS is great British Company with a fantastic offering, as dividend investor I will take the opportunity to add to my holding

Patrickmylnetrade

Mark , once again you have provided us with a fantastic resource for investing, whatever readers thoughts are on this organisation and it's potential.

Articles like this, for me and many others, are invaluable as they provide a detailed analysis which i suspect most of us wouldn't achieve personally. This is why I happily invest my annual subscription with Stockopedia.

As mentioned below, your detailed and thorough analysis really helps paint the picture for or against the investment case and for that i thank you (I'm on the sidelines atm but have added it to my watch list ).

I chuckled at your moat analogies!

Please keep up the good work and good luck with your investment(s).

Funnymoney

Very good piece Mark. Thanks very much for this.

I sold out of RWS because (perhaps wrongly) I have been shocked how easy it is for me (without cost) to have a document translated immediately via many different AI companies. I suspect there will always be a need for the services RWS provide, but I think some of the easy margin may be erased. The question is: how much of their business is very sticky because they are perceived as experts and they are doing everything for the client? Often it is a lot better to outsource most of this translation etc. rather than the company doing it for themselves. It might still mean however that they won't return to their former glories.

Callum Cowan1

Another top quality post by Mark, thank you very much

Probably not an investment for me currently but I hope ed and stockopedia top brass read this comment

Although all staff put out fantastic content I personally gain the most from Mark's output, I would like to see more frequent articles from Mark

As a relative newbie investor the way Mark writes his articles taking you through his thought processes and displaying the relevant info he looks at from within stockopedia is invaluable in learning how to gain the most from the subscription and also how to become a better investor

I think yous offer a free trial here at stockopedia and I feel potential members seeing content like the above if they are at a similar investment stage as myself would find the membership cost as a must

Cheers callum

Burnt Onions

25th Apr

Superb analysis Mark, I very much value your content, I think it's one of the best.

I normally agree with most of your ideas but with this one am finding it quite difficult to be contrarian (for all the reasons you list) so will wait and watch.

Thanks again.

Chasbas

Great piece Mark!

Apparently there are other translation companies out there owned by private equity because the business is so cash generative and therefore attractive to them. I wonder if RWS has now become a takeover target to PE? After all it is the market leader by size with market leading technology. There must be synergies to a PE buyer??

Berksbee

Thanks Mark, this is nothing short of excellent IMO. Long term holder and due to top slicing still well in the black. I have spent my career in tech and my experience of other hype-cycles leads me to agree with you that the negative impact of AI is over done in this case.

I will be adding over the next few days.

One additional point is I think RWS could be a takeover target - the people, content and relationships alone will be tempting for a bigger player at this price.

MIK

Thanks for the article Mark - do you know what the simplest way to find articles from a specific person is eg to find older articles you, or Edmund for example, have posted?

Thanks, Michael

Mark Simpson

Hi Chasbas,

It could well be. There was PE interest in 2022 but came to nothing. My impression is that Brode had his eye on the highs of the previous few years, and PE like a 30% premium to keep as much of the upside to themselves.

Recent trends and market valuation of the business may persuade Brode that it would be better off in private hands though. His 24% doesn't completely block any deal but it would be difficult without his support. I'd be pretty sure PE would like to own this business. However, I doubt a deal will be done at a price that all parties think is reasonable.

Mark

Hi Michael,

Two easy ways, one is to click on my profile, then activity and filter by posts if you want to see everything I've written. Or if you are looking for a specific company then go to the StockReport for that company and then the discussions tab and all discussions tagged with that company will be shown.

HTH,

Great, thanks Mark

cadmunkey

26th Apr

Thanks Mark, always like reading your articles.

RWS Holdings: translating profit into increasing dividends

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Mark Simpson

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