Venture: UK Mid Cap

Issue 6;

A UK growth stock that has derated, pays a good dividend, is buying back stock, and the analysts think it’s more likely to double than be a value trap.

Taking Profits on Restaurant Group (RTN) following the bid.

RWS Holdings (RWS)

RWS are a web-focused support services business, primarily enabling translation across all languages and supporting content, regulation and intellectual property.

According to their report, “44% of global consumers are frustrated by the dominance of the English language on the internet and technology.” Translation drives their business, and they claim to be the market leader with longstanding AI capabilities.

I once read that computers were terrible at translation when they applied logic by word-for-word replacement. The solution was to get the computers to read translated books and mimic the style. That is very much an AI task – complex and intensive but not intelligent.

What appeals to me is this was a highly rated growth stock that has come back down to earth. They have expected sales in ’23 of £758 million with £119 million of free cash flow. The gross margins are 46.6%, which is high. £76 million of cash exceeds £57 million of debt, so the balance sheet is strong.

The one complaint is that the earnings growth has slowed since 2018, which has seen a massive price fall in 2022. A good example of a stock caught up in the recent tech bubble courtesy of excessive money printing. Overblown expectations came back down to earth, something we will see in big tech one of these days.

RWS Holdings Still Growing, with an Upgrade

Company insiders are keen buyers, along with the company itself, which is engaged in a buyback programme, which is supportive. I would also add that interesting external shareholders include Anthony Cross from Liontrust Special Situations/Smaller Companies and Jane Tufnell, the co-founder of Ruffer, who now manages the Odyssean Investment Trust (OIT), part of Harwood, known for the North Atlantic Smaller Companies Fund (NAS).

Insiders Are Buying RWS

There’s a 5% dividend yield, which means investors are paid to wait. The shares trade on an expected 8.6x PE for ‘23. The 6 analysts’ (5 buy, 1 hold) target price is 461p, compared to the current price with a recent upgrade, shown by the blue line in the first chart.

The chart could be better, but the analysts seem committed to their price targets, and I believe the buyback will be supportive. Why wait?

Risk

This is an AIM stock, which trades on London’s junior market, but liquidity is an impressive £2m per day, which is very good for AIM. The balance sheet is strong, the business seems to be resilient, and the value is compelling. The obvious risk is a severe downturn in trading or an unknown event. I deem this medium-high risk.

Venture Update

I have added an Analysts’ Target column. It shows the upside or downside of the current price compared to their price.

Sell The Restaurant Group (RTN)

The Restaurant Group (RTN) has been bid for. The bid from Apollo came in at 65p, which is the target price. It trades slightly higher, which means there is hope for more. Venture will sell.

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture