Record-breaking RWS is reassuringly expensive

It may have been by fractions of a penny, but shares in patent translation services provider RWS made a new record high Tuesday. We heard in April it had probably made more money than ever before, but even these numbers took some in the City by surprise.

In-house forecasts were pretty accurate. Revenue was up 35% to £76.6 million in the first half ended 31 March, versus indications of "not less than £76 million".

Adjusted pre-tax profit up 40% to £19.4 million compared with April's guesstimate of "at least £19 million". Adjusted earnings per share (EPS) came in at 6.9p.

Admittedly, February's Luz acquisition contributed £1.1 million in six weeks of ownership, and currency benefits were an extra £1.3 million. However, strip these out, plus adjusting for the one extra month's sales at October 2015 purchase Corporate Translations Inc, like-for-like sales grew by 10%.

That's much better than the 5-6% pencilled in by Shore Capital analyst Ben McSkelly.

In also includes a 35% increase at its core Patent Translation and Filing division, which translates over 80,000 patents and intellectual property related documents each year. And China, where RWS has three offices and is beefing up its sales team, is a big driver here.

"Demand from European and North American corporates applying for patents in China continues to expand, whilst we are now also seeing increasing demand from Chinese firms applying for patents in other markets," the company tells us.

None of this should really be a surprise, however. RWS has delivered 13 unbroken years of revenue, profit and dividend increases. This time the interim payout rises by 13% to 1.3p.

And it's a business our AIM writer Andrew Hore highlighted in December 2015 when the shares were worth just 179p. "Companies that consistently grow their dividend also tend to provide investors with capital growth," he said. They're now changing hands for over £4.

And the only thing that's stopped our companies analyst Richard Beddard adding RWS to his portfolio is valuation.

We're still waiting for ShoreCap's updated forecasts, but upgrades are already in from Will Wallis over at Numis Securities.

Both profit and revenue estimates increase by between 2% and 3.5%. EPS forecasts for the year to September 2017 are up half-a-penny to 13.9p and by 0.3p in 2018 to 14.3p, and Wallis admits to a "relatively cautious approach to forecasting".

RWS shares topped 406p in early deals Tuesday, but have since eased back to 395p, still up 2% on last night's close. But a forward price/earnings (PE) ratio of 28.4 only drops to 27.6 for next year.

That's eyewatering stuff, and a premium to ratings going back five years or more. However, it's a price investors have been willing to pay for current levels of growth, and market watchers said RWS was overvalued on a PE of 18.

"The business's solid long-term growth record, strong market position, excellent cash generation, and consistent strategy are all attractive, not least alongside the AIM IHT rules," writes Wallis.

And, remember, RWS said today that trading during the first two months of the second half was "in line with our enhanced first half performance".

But that valuation - 26 times enterprise value/net operating profit after tax (NOPAT) for calendar year 2018 - is enough for Wallis who sticks with his 375p price target. "Given the strong share price and elevated multiple we lower our recommendation from 'add' to 'hold'."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.