Shares digital

The patent translator benefits from the rising demands of intellectual property

by Timon Day

RWS Holdings, (RWS:AIM) 364p, Stop loss 291p

Shares summary

Well-managed firm offers a strong track record, highly defensive characteristics, plenty of cash and cheap acquisitions, all of which point to further earnings forecast upgrades

Business:

World’s leading patent translation company

Vital stats:

Market value: £150 million

Historic PE 2007: 15.0

Prospective PE 2008: 14.0

Prospective PE 2009: 12.9

Sector PE: 12.6

1-month relative strength: -7.6%

1-year relative strength: +21.7%

Yield 2008: 2.9%

NMS: 2,000

Spread: 1.9%

In these troubled markets there is nothing more cheering than substantial earnings upgrades, and RWS Holdings (RWS:AIM) has one of the best earnings forecast profiles on Aim. At the beginning of this year the consensus earnings per share (EPS) estimate rose from 23p to 26p for 2008 and from 24.2p to 27.2p for 2009. The current consensus for 2009 is now 28.2p. Invariably earning upgrades are the best indicator to future share price performance.

RWS dominates its space translating over 50,000 patents and intellectual property agreements a year for its huge blue-chip multinational clients based in Europe, North America and Japan. It is ranked number one in its field with a global market share of around 15%.

The firm specialises in the medical, pharmaceutical, chemical, aerospace, defence, automotive and telecoms industries. Its much smaller information division accounts for around 13% of profits searching patents.

There is an increasing need for big companies to protect their intellectual property and so more and more are subscribing to RWS’s new PatBase. This is the world’s largest searchable commercial patent database. Launched two years ago it now has 425 subscribers – a 52% jump in the first half of this year, when its revenues soared 56%. RWS continues to win plenty of large new clients and importantly retains most of them.

The firm’s global market share of 15% continues to grow strongly in a fragmented market. RWS has been able to increase prices slightly as well but increased productivity was more important in lifting first-half profits by 26% to £6.8 million on sales up 19% at £27 million. The strong euro should have further boosted profits as two-thirds of turnover comes from the eurozone but a hedging operation tied euro receipts in at just 69p to the pound until March next year.

Admittedly new legislation allows those filing EU patents not to have to translate them into local languages as long as the original is in English, French or German. This will knock around £2 million a year off RWS profits from 2009.

Yet RWS is more than able to absorb this hit. Demand for its services is growing rapidly especially in Japan and the Far East which are both unaffected by the new legislation.

RWS floated at 125p in 2003 and the share price has trebled since then. A good run earlier this year took the shares from 319p to 403p, before a pull back to the 364p mark. The prospective price/earnings ratio (PE) is around 20% below its recent historical average suggesting considerable share price upside. The prospective 2008 PE of 14 falls to 12.9 next year.

The £150 million cap has supplemented strong organic growth with shrewd acquisitions funded by its excellent free cashflow, which rose by £2 million to £5.3 million in the first half of this year. Net cash stands at £18 million even after the £6 million purchase of German technical translator DWS in February.

Brokers Arbuthnot, Numis and WH Ireland carry an average price target of 450p, for 24% upside in the stock.