Organic growth still slow at RWS

RWS (RWS) is a head scratcher. On the one hand, the translation specialist is reporting strong growth. Revenue is up 8 per cent year on year, while operating profit has jumped by 50 per cent to £86.3mn. The group is also extremely cash-generative: cash conversion sits at 110 per cent, and management has hiked the dividend for 19 years in a row.

However, underlying growth remains underwhelming. Across the group, revenue is down by 1 per cent when acquisitions and foreign exchange movements are taken into account. This is largely the result of a poor performance from RWS’s regulated industries division – which provides language services for sectors such as life sciences and healthcare – and its intellectual property arm.

The latter has been badly affected by the forthcoming introduction of the ‘unitary patent’, which should make it possible for companies to get patent protection in more than 20 EU member states by submitting a single application. This is clearly bad news for a company that translates and files patents. 

Management is on a mission to improve organic growth, and plans to increase investment in technology and infrastructure. Meanwhile, it says its strong cash position will facilitate more acquisitions and further dividend hikes. We are concerned that improvements will be slow to materialise, however: consensus forecasts for 2023 suggest that adjusted pre-tax profit will dip from £136mn to £134mn.

If RWS’s growth strategy starts bearing fruit, the group looks ripe for a rerating. It is trading on a forward price/earnings ratio of just 12.7, compared with a five-year average of 22.3. For now, however, we downgrade to hold.

Last IC View: Buy, 384p, 10 June 2022