RWS: Quality does not come cheap

The good times are definitely rolling at RWS Holdings (RWS). Just a week before it finds out whether it’s been named AIM Company of the Year 2017, the patent translation services provider has issued another bullish trading statement. Victory seems unlikely given it’s up against FeverTree (FEVR) and (BOO), but reporting its “best ever year” keeps it in the running.

An update on trading for the year ended 30 September showed momentum continuing, with both revenue and profit set to beat expectations. The former will be “not less than £163 million… [a year-on-year] increase of at least 33.6%”, while adjusted pre-tax profit “is also expected to have performed strongly”.

That’s due to three factors: improved gross margins; the acquisitions of life sciences firms Corporate Transactions Inc and LUZ; and sterling weakness, as over 80% of revenue is in foreign currency.

All other divisions performed well and the firm’s financial position has continued to strengthen, with a material increase in shareholder funds, we’re told.

Chairman Andrew Brodie says RWS is “exceptionally well-positioned to drive further international expansion”, with both its financial and market positions remaining strong.

“We continue to see an interesting pipeline of acquisition opportunities to complement our organic growth,” he tells us. “There is strong momentum in the business and we are confident of further significant progress in the new financial year.”

So, it looks certain RWS, which translates patents and helps companies file them, will record a 14th consecutive year of revenue, profit and dividend increases. That saw shares surge briefly to a record 448.75p before settling back to 434p, up 10%.

Despite a clear upward trend, RWS shares weakened into this update and some remain cautious. Interactive Investor’s companies analyst Richard Beddard has the firm on his watchlist, but hasn’t felt compelled to buy just yet.

Will Wallis, analyst at broker Numis Securities, has upgraded forecasts, with full-year 2018 earnings per share (EPS) now tipped to increase by 8% to 15.4p. “RWS continues to deliver robust cash generation and very good organic growth in addition to the strong recent acquisition track record,” he says.

Still, that EPS figure means RWS trades on a meaty forward price/earnings (PE) multiple of 28 times, reducing only slightly to 27 times for 2019. An enterprise value/net operating profit after tax (EV/NOPAT) multiple of 25 times is also pretty steep.

It’s why, despite hiking his price target 15% to 430p, Wallis still only has a ‘hold’ recommendation on the stock.

Canaccord Genuity is more positive. Ranking RWS shares on Quality, Momentum and Value, it reckons they’re worth 476p. “We believe RWS is an excellent business that is growing both organically and via bolt-ons whilst maintaining returns,” analysts say. Seems investors agree for now.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.