Moravia, Trump Tax Cut, US Dollar in Spotlight as RWS Posts Half-Year Update

UK-headquartered and London-listed language service provider RWS provided the markets an update on its financial first half-year 2018 ended 31 March 2018. It is the first time RWS has reported financials for a period since its acquisition of Moravia. Thanks in large part to the acquisition revenues jumped by 82% from GBP 76.6m (USD 106m) in the first half of 2017 to GBP 139.6m (USD 194m) in the current half year period.

In terms of the bottom line, RWS guides for pre-tax profit of “at least” GBP 28.3m (USD 40m). The company says both revenue and profit are “broadly in line” with their expectations. Pointing to a weakening US Dollar, however, RWS cautions investors that “if the current rates prevail, we would expect a profit outcome slightly below market consensus.”

RWS now runs five separate divisions. Patent Translation and Filing; Patent Information; Life Sciences; Language Solutions; and Moravia. While no detailed results were broken out for all of the five units, RWS said that revenues in Patent Translation and Filing as well as Language Solutions were up 11%, Life Sciences grew revenues by 9%, and Patent Information delivered a “steady” performance.

Life Sciences Growing

In a research note Berenberg, an investment bank, praises the strong performance in Life Sciences and highlights that a “meaningful portion of this growth has come from successful cross-selling between the CTi and LUZ businesses”. Furthermore, Berenberg points out that CTi and LUZ have complimentary service offerings and only share Pfizer as a customer. Therefore, Berenberg sees substantial upside for Life Sciences through cross-selling and integration. Finally, RWS is integrating Moravia’s life sciences business into RWS Life Sciences. RWS Chairman Andrew Brode promises the integration will be complete by end of September 2018.

Moravia Headwinds

With regards to Moravia, the picture appears mixed. In its statement, RWS highlights that Moravia has seen “foreign exchange headwinds” as it generates over 95% of its revenues in USD but has the majority of its cost base in Euro or Czech Koruna. In addition, and perhaps hinting at some softness in the Moravia business, RWS points out that Moravia’s “performance has been held back by a lower volume of activity than expected from a few clients.”

While RWS provided no further details as to Moravia’s performance, Berenberg’s note said that Moravia grew 9% in the first half. The analyst pointed out that while revenues with Microsoft were down year-on-year (according to the note, Moravia lost a Windows contract), “sales from Amazon, Apple, Facebook and Google all increased by more than 10%.”

Trump Bump

Like much of corporate America, RWS is experiencing a Trump Bump. The company said its “expected effective tax rate of c.23% in the current financial year” will settle “at approximately 21% from 2019 onwards” and result “in a beneficial impact on earnings per share calculations and cash generation.”

But Stock Tanks

Berenberg has a price target of GBp 530 for RWS, while fellow stockbroker Numis set the target at GBp 490. Both brokers rate RWS a BUY. However, RWS opened sharply lower in early London trading, with shares down by 12%, wiping more than USD 200m off the company’s market capitalization at the time of writing. Clearly, investors had expected an earnings and revenue beat from RWS and for Moravia to provide more upside potential going into the second half of the financial year.