Acquisition supercharges RWS growth

At first glance, RWS (RWS) has had a bumper year. The translation and intellectual property specialist’s sales have almost doubled, and its adjusted profit before tax is up 66 per cent. However, much of the group’s growth is a result of the acquisition of SDL, one of the world’s largest language service providers. 

RWS is divided into four divisions: language services, regulated industries, IP services and language & content technology. On an organic basis - that is to say, before contributions from acquisitions - group revenue dipped 1 per cent in the year to September, hampered by currency headwinds.

The IP services division, which now accounts for 16 per of group sales, has been particularly affected by the pandemic: revenue fell a tenth in 2020 and has yet to rebound. Management blames a reduction in patenting activity, exacerbated by a slow-down in the European Patent Office. 

Elsewhere, the situation is brighter. RWS’s regulated industries arm - which focuses on the language service needs of the life science, financial, legal and managed healthcare industries - saw organic revenue climb 8 per cent on a constant currency basis, while language services also enjoyed some organic growth. 

However, it was the acquisition of SDL in November 2020 that supercharged RWS’s balance sheet. New shares worth £625.5m were issued in order to buy out SDL, whose shareholders received 1.2246 RWS shares for every one they owned. RWS's share price subsequently dipped in December and January - no doubt partly due to some SDL investors cashing out - but has since begun to climb once again.

Despite the significant costs involved in merging the two businesses, RWS has reported a net cash position (before lease liabilities) of £45.3m, compared with net debt of £15.1m the previous year. Management said the integration of SDL's clients, people and capabilities is now largely complete, and has resulted in £16m in cost synergies so far. Berenberg has forecast a further £12m and £5m of net synergies in FY22 and FY23 respectively. 

SDL could also act as a buffer against further Covid turbulence. Following the acquisition, client concentration has reduced and no one client accounts for more than 10 per cent of group-wide turnover.

Shareholders will also be pleased to know that dividends have increased once again, continuing an unbroken record dating back to its 2003 listing. Meanwhile, growth is forecast in FactSet consensus EPS estimates of 27.7p for the year to September 2022, and 30.8p the following year. Against this, investors need to weigh up enduring challenges in the legacy business and their impact on margins. Hold.

Last IC View: Buy, 625p, 9 Jun 2020