Is RWS Holdings the best kept secret?

RWS Holdings lacks coverage, due to two analysts covering their story.

Founded in 1961, as a commercial, patent and technical translation services. It is a bit of a boring business.

But boring is what you like because it grows your investment portfolio.

To evaluate RWS Holdings, a look back in the last eleven years (starting from 2005) and by asking the following questions: –

  1. How has the revenue growth pattern change?
  2. Has the company been paying dividends? What percentage would the yield be if you (hypothetically) held it for eleven years?
  3. What is their operating margins? Is it inconsistent or consistent?
  4. Does the company hold any debt?
  5. Does it spend a lot on capital expenses?
  6. Given it is a service-based provider, what is the cost per employee?
  7. Should you be worried about “off-Balance Sheet” items?

 

Afterwards, we will see if there any weaknesses that could flare up in the future. Then we shall talk about valuation and share price forecast.  Before all that let’s talk about the half-year results.

RWS Half-Year Results

The results weren’t surprising because of acquisitions. Revenue jumped 35%, as expected with EPS rising by 27% from 3.8 pence to 4.9 pence.

Meanwhile, non-current assets have jumped by 70% to £176m. Half of that came from goodwill.

Cash balance remains unchanged, but debts rose to £48m from £30m, while equity rose to £152m. Net cash earnings came in at £9.86m from £8m. However, there is some distortion on free cash flow numbers because of these big acquisitions been taking place in the past two years.

On balance, I think the share price (see my share price forecast below) and market valuation of £900m are priced in for RWS Holdings.

 

Full Steam Ahead for RWS Holdings

When it comes to revenue, it is full steam ahead, as it grew from £35m to £122m. On an annual basis, it averages 12%.

Analogy: – If RWS Holdings was a country it would be the fastest in the world.    

Revenue growth was positive for every year, though the odd periods show growth slowing by 1-2%, whereas other periods see growth racing up to 20%.

 

Steady Operating Margins

With operating margins in the high teens and 20s, it makes RWS a competitive business. The highest operating margin is 24.4% in 2013, with the lowest at 17% in 2005. Current margin is at 21.7%.

On an absolute basis, Operating Profits grew from £6.4m to £26.5m.

Having such high operating margins gives a business many advantages such as: –

Lower debt borrowings, if any;

Free cash flow;

Shareholders dividends, funded internally;

Able to meet short-term obligations.

 

Shareholders Raking in the dividends

RWS has forked out nearly £70m in dividends to shareholders in eleven years. How would it translate for a typical investor?

At the beginning of 2005, you discover RWS and decided to invest £30,000 into the company at £1.84 per share, which gives you a holding of 16,304 shares. Details in the table:

Your RWS Holdings portfolio

Notes

-In February 2015, RWS Holdings did a share split of 5 to 1, meaning your portfolio holding of the company would jump five times.

-The data doesn’t include the current financial year.

 

Over 11 years, your £30,000 investment (ignoring transaction fees and VAT) would have seen RWS Holdings return £27,211.40 in dividends.

At the same period, your RWS Holdings would be worth £203,937.50* (81,250 multiplied by £2.51 per share (2016’s average share price)).

* It’s probably worth £315,250 at today’s share price or a 10-bagger.

Then there is the yield on costs. Since you held this stock for eleven and RWS Holdings has kept increasing its dividends, this means you get an increase in annual payment every year.

So, in 2005, the yield from your initial investment was 2.8%. By 2016, that yield would have risen to 13.54%. 

 

RWS Holdings has zero debt, until last year

 

Over the last eleven years, the debt was negligible, until last year when it made an acquisition for Corporate Translations Inc for $70m. The funding for this acquisition is by a US$45 million five-year loan and internal cash resources, which is why it has debts of £29m. But, that amount is manageable and stable (debt to net income is 1.6 times; debt to equity less than 25%), it would soon be paid off.

 

Capex is fairly small, but don’t forget acquisitions

Capex averages £1.9m per annum, but capital expenses vary widely from period to period meaning in one year you see 7 to 8 times more capex.

A more useful interpretation is how capex generate extra sales. By totalling capex from 2005 to 2015, but ignoring 2016’s capex, this totals £22m. Then, you got to deduct the £13m of depreciation from capex, which helps to maintain “existing assets” to maintain “existing sales.” That means it spent a net £9m to expand the business.

So, how much “extra sales” have this produced in the last 11 years?

Answer: – £86m. That is nearly every £1 spent, you get £9.50 in extra sales.

But is this the right answer? Not really, because of the series of acquisition it has made.

Ignoring last year acquisition of Corporate Translations Inc, the total acquisitions comes to £33.5m. So, by adding £33.5m to £9.5m gives £43m.

Realistic Answer: – £86m. That is £1 spent will RWS £2 in extra sales.

 

RWS Holdings – Staff Productivity

Looking at plain data on employee costs and the business: –

  1. Revenue per employee has risen from £108,057 to £154,822;
  2. Costs per employee, which includes benefits have risen from £34,964 to £42,340;
  3. Profits per employee have increased from £13,735 to £24,530.

Disseminating the above, we see the rise in revenue per employee more than cover the rising wages of staff leading to an increase in profit per employee.  

Other interpretation of the employee data you could make out:

  1. Staff costs, which accounts for 32.36% of total sales in 2005 saw a fall to 27.35%.
  2. If RWS Holdings is a partnership, meaning each worker has an equal stake in the company, then each employee (theoretically) would see their equity stake increased from £51,690 to £137,944.

 

Overall, RWS Holdings was becoming an increasingly competitive business.

 

Any “Off-Balance” Items to Worry about

Referring to its total lease, there isn’t much to worry about because it comes to £5m and the annual lease charge was £1.5m.

 

RWS Holdings Valuation

The more consistent the earnings, the more valuable it is in the market.

When comparing their operating profit and operating cash profit against RWS Holdings enterprise value by using EV/EBIT and EV/OCF ratios. The multiples have increased.

On an annual basis, the ratios have jumped to multiple highs of 20.5 times for EV/EBIT and 18.4 times for EV/OCF. Both these ratios are based on the average share price of £2.51 in 2016. Today, the shares are trading at £3.88 or 55% higher.

Meaning on a trailing EV/EBIT it is now at 31 times and its EV/OCF is at 27 times. The reasons why valuations are this high is the anticipation of higher earnings through acquisitions.

 

RWS Holdings making unprecedented acquisitions

I say this because RWS engages in organic growth and their biggest acquisition before 2015 was £14m back in 2013.

In Nov 2015, it acquired Corporate Translations Inc. (CTi), a Connecticut-based life sciences translation and linguistic validation provider for a $70 million in cash. (that is £49m) CTi shows $23m (£16m) in revenue with an adjusted EBITDA OF $4.8m.

RWS paid 3X CTi revenue.

 

In Feb 2017, RWS made another acquisition in LUZ, Inc., a US-based life sciences language services provider for $82.5 million. RWS is placing 12.1 million new Ordinary Shares to raise £40 million to part-fund the Acquisition with remain being funded by $26.3m banking facility with Barclays Bank.

In 2016, LUZ Inc. shows revenue of $29.2 million (2015: $23.7 million; 2014: $21.2 million) and operating profit of $7.7 million (2015: $3.6 million; 2014: $3.4 million).

Again, this is a good acquisition with a good growth engine.

In the past two years, RWS spent $150m (£110m) which is a lot of money. But it will boost their sales and profit growth. 

The effects of both these acquisitions

First, total debt stands at £48m.

Second, it has diluted their equity by 5% due to placing 12m shares.

 

 

 

Share Price Forecast

Forecasting RWS Holdings share price is hard due to some big acquisitions and uncertainties over other possible takeovers. Here is my forecast: –  

 

In the short-term forecast; – At £3.88 per share or £886m market value, I think the share price will trade around £3.30 to £4.20 in the next six months.

 

In the medium-term forecast; – After six months, RWS Holdings has revenue projection of £160m and adjusted EPS of 13.6 pence per share from 10.9 pence per share last year. That means the forward-adjusted P/E is 29 times.  

 

In the long-term forecast; – After 18 months, provided it didn’t make further acquisitions, analysts are forecasting revenue of £173m and adjusted EPS of 14.4 pence per share for 2018, giving a 2-year forward-adjusted P/E is 27.5 times.  Taking the 11-year average P/E of 18 times, the valuation is on the high-side.

 

Unless the forecasts changed dramatically to the upside, then RWS Holdings in fully-priced in for the next 18 months and the shares would hover between £3.50 to £4.50.

But, it doesn’t take away how great this company is, so at the very least it is a hold.

 

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Disclosure

The opinions expressed by the writer is for entertainment and research purposes. It does not constitute professional investment advice. Data is correct on available information at the time.

Finally, the writer does not own the company’s stock, unless stated otherwise.