During a commodities boom, investors may do better investing in companies providing miners with crucial equipment such as bulldozers or earth-movers, rather than taking a punt on the metals producers themselves. This “picks-and-shovels” approach to a promising sector can be applied to technology and bioscience too.
Enter RWS, an intellectual-property support-services company whose core business is patent translations. These add much more value than ordinary ones because the choice and meaning of just a few words can make the difference between a patent being valid and defensible or not.
Providing this service comes with considerable pricing power: customers will be more interested in the quality of the work than getting the translation on the cheap. RWS has expanded – by organic growth and acquisition – into patent information databases and translations for the pharmaceutical and bioscience sectors. Linguistic precision and technical knowledge are crucial in these fields too.
A stellar growth record
RWS has an impressive growth record. Revenue and operating income both more than doubled between 2012 and 2017, while the dividend also doubled over the same period. The share price, meanwhile, has quadrupled in the past six years. The last full-year results (to the end of September 2017) marked the 14th successive year of growth for sales, underlying profits and dividends since the group floated on Aim in 2003. RWS is now one of Aim’s top-50 companies.
The latest half-year results showed continued strong growth, driven partly by a five-month maiden contribution from Moravia, a Czech company acquired last year. Even adjusting for Moravia and currency effects, profits still grew by 12% year-on-year in the six months to April 2018.
RWS’s five divisions
In all, RWS has five divisions. The two largest are Patent Translations and Filing (which accounted for 35.4% of first-half revenue) and Moravia (37.4%) followed by Life Sciences (18.7%), Language Solutions (5%) and Patent Information (3.5%).
Moravia provides technology to adapt content, software, websites and various applications for more than 160 other languages and markets. The acquisition of Moravia adds operations in the Czech Republic, the US, Japan, China, Argentina and Ireland for RWS. Life Sciences focuses on technical translations for pharmaceutical companies and clinical researchers. Language Solutions covers other translations, while Patent Information provides patent search, retrieval and monitoring services, and PatBase, one of the world’s largest searchable commercial patent databases.
Patent Translations and Patent Information are the most profitable divisions, followed by Life Sciences and Moravia. Language Solutions requires the least technical expertise and is thus the most exposed to competition. First-half sales growth was robust across the board, with underlying sales growth of at least 9% in most divisions, although Patent Translations reported an increase of 1% following a strong performance last year. RWS has an excellent record of integrating acquisitions and expects £5m of cost savings from this one. It has also always been good at generating free cash flow, so it should have little trouble cutting its net debt of £82.8m, a figure inflated by the loan taken to buy Moravia. Free cash flow in the first half reached £24.9m.
The outlook is promising too. Executive chairman and major shareholder Andrew Brode says that Moravia saw “an excellent start to the second half with new client wins”. Overall, RWS is benefiting from two strong long-term trends – globalisation and companies’ growing tendency to outsource patent and technical translations.
A core holding at a reasonable price
† Includes only five months of Moravia
** Before amortisation of acquired intangibles and acquisition costs
RWS is not easy to value because of the recent acquisition of Moravia, which will increase turnover by some 70% in the full year. Given this, the p/e ratio of roughly 41, based on the current share price and 2017 earnings per share (EPS), is meaningless.
A better estimate of EPS for the ongoing business is to take RWS’s first-half EPS of 8.2p, excluding acquisition costs, then top this up to 8.4p to allow for six months of contribution from Moravia. As for the second half, we can guess the likely outcome as the first-half figure plus organic growth (say 6% given first half underlying annual growth of 12%) and a first instalment of the £5m cost savings RWS expects from the Moravia deal (around £2m). The year to the end of September will contain only 11 months of Moravia, and costs are likely to be higher than savings at first.
Taking all that into consideration, a full-year EPS of 17.9p is a reasonable projection.Using the recent share price of 450p, that gives a p/e of 25.1 for 2018. The following year (2019) should see more growth (assume 12%), £3m of further synergies and a lower p/e of around 21.
The upshot? Given the company’s long record of profitable growth, a forward p/e of 25 falling to 21, and a current dividend yield of 1.7% (assuming a 2018 dividend of 7.5p since 2017 was 6.5p and the first half dividend was raised by 15%), it is at a reasonable price – and I consider RWS a core investment (I own it). The table above shows RWS’s recent results and my estimates.