RWS launches £50mn share buyback programme

Shares in RWS Holdings (RWS) were heading in the right direction after the tech-enabled language services provider revealed a slight uptick in half-year sales. Profitability was constrained by reduced volumes and an unfavourable business mix, but bosses said that full-year figures should fall in line with existing guidance. It’s worth remembering, however, that the group warned on profits towards the end of April. Adjusted pre-tax profits dipped by 10 per cent to £54.4mn, while the underlying margin contracted by 210 basis points to 14.9 per cent.   

The raw figures would have done little to reassure investors following a challenging trading period, and it is far from certain whether margins will be bolstered in the near term. So, while the group saw “overall price recovery of rising costs”, the “competitive dynamics in other end markets” could dampen profits as management has prioritised the attainment of longer-term revenue.

The release came a month after the group detected a cyber attack on a legacy project management application, although the breach had no significant material impact on finances. Nonetheless, RWS's market valuation has slipped by a third over the past 12 months, and doubts linger over the direction of trading volumes. Cost-saving initiatives have been introduced and management now expects to realise £10mn in savings in the 2023 financial year and a further £25mn in 2024. However, RWS will incur an estimated £12mn in related exceptional costs during the second half of this year.

Very much in keeping with the prevailing zeitgeist, the group is confident that business will improve due to its “longstanding AI capability”. Indeed, 60 per cent of its translations are processed by AI through the Language eXperience Delivery (LXD) platform. One wonders, however, whether the anticipated growth in AI technology could effectively reduce barriers to entry in translation services over the long run.

The group notes that several new business wins were recorded over the period, and RWS is still benefiting from “high levels of retention and satisfaction across [its] existing client base”. Management, therefore, felt justified in launching a £50mn share repurchase programme to be completed by February 2024.

Regardless of the market response, this was a mixed showing by RWS. Although it is a well-established business, we are left with the impression that it’s a work in progress. Group chief executive Ian El-Mokadem said RWS was in “an advanced stage with a number of bolt-on opportunities”, a possible conduit to growth. Unfortunately, modest expectations on this front are reflected in the lowly FactSet consensus rating of 10 times forecast earnings. Hold.

Last IC view: Hold, 354p, 15 Dec 2022