Following 10 years of uninterrupted earnings growth, progress has stalled at patent translation business RWS Holdings (RWS) as corporate cost-cutting, currency headwinds and a highly competitive market have started to bite. Brokers are forecasting that profits will fall and EPS is still not expected to have recovered to last year's levels by 2017. However, the shares' rating has so far proved resilient - we think excessively so. Indeed, priced at 20.9 times Bloomberg consensus broker EPS forecasts for the next 12 months, the price-to-earnings ratio is close to the top of its five-year range, which stretches from a high of 23.7 times down to 8.8 times, with a median rating of 17.4. With pre-tax profits forecast to fall not only this year but in FY2016, too, we think investors should get out now.
- Organic growth deceleration
- Increased market competition
- High PE rating
- Weak euro
- Net cash balance
- Growth in China
While management attributed RWS's disappointing first-half performance predominately to the impact of the weak euro, sales were nevertheless flat at £46.9m on a constant-currency basis. Its patent translation business, which accounts for just over half of group revenue, provides patent translation services to blue-chip companies globally. While this business has secured client wins in China as European and US companies seek patent protection there, this has been offset by a number of the division's corporate clients scaling back their spending. In addition, management has stated that newer client gains have not translated into the level of sales they had previously expected. This led to sales growth of just £0.1m from this core division during the first half at constant currency rates and a £1m decline at actual exchange rates to £25.3m.
The patent translation operation isn't the only part of RWS facing challenges. The group's commercial translations business is also experiencing a slowdown in growth. The business operates in the UK, Germany and Switzerland. Increased competition, particularly in the UK, from new entrants into the market meant sales grew only £0.2m in constant currency terms to £8m and fell 4 per cent at actual rates.
In 2013 RWS acquired the remaining two-thirds of US-based patent filer Inovia that it didn't already own. This business now accounts for around a fifth of group sales. While the US is the largest patent filing market in the world, RWS is not yet reaping the full benefits of its expanded position there. Some smaller corporate client wins were not enough to offset lower revenue contributions from Inovia's existing client base during the first half and gross sales fell by £0.1m to £9.4m. What's more, management expects the business's subdued trading to continue into the second half of the year.
RWS HOLDINGS (RWS) | ||||
|---|---|---|---|---|
| ORD PRICE: | 145p | MARKET VALUE: | £307m | |
| TOUCH: | 146-150p | 12-MONTH HIGH: | 185p | LOW: 120p |
| FORWARD DIVIDEND YIELD: | 3.3% | FORWARD PE RATIO: | 20 | |
| NET ASSET VALUE: | 38p* | NET CASH: | £21.5m | |
| Year to 30 Sep | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2012 | 68.8 | 17.2 | 6.2 | 3.50 |
| 2013 | 76.2 | 20.1 | 7.7 | 4.06 |
| 2014 | 93.6 | 22.1 | 8.1 | 4.58 |
| 2015** | 91.3 | 21.1 | 7.7 | 4.70 |
| 2016** | 94.2 | 20.1 | 7.3 | 4.80 |
| % change | +3 | -5 | -5 | +2 |
Normal market size: 1,500 Matched bargain trading Beta: 0.54 *Includes intangible assets of £39.4m, or 19p a share **Numis Securities forecasts, adjusted PTP and EPS figures | ||||
