Stockpickers: AI forces RWS to learn a new vocabulary

To an already long list of disruptive forces — climate change, the macro environment, competitors and compliance — companies must now add the double-edged sword of artificial intelligence, writes Rosie Carr. 

Media, software and technology companies are all right up there on the front line. So too is RWS, a translation specialist that enables clients and their legal and intellectual property documents to be understood anywhere. In recent years it has expanded into data analysis. Now it’s having to navigate the AI challenge head on, which it is doing with new offerings and adapted services, such as AI data training brand TrainAI.

RWS is no stranger to upheaval — it’s been mugged by disruptive forces time and time again. A year ago it was winded when the EU allowed companies to secure patent protection in more than 20 member states without needing to file multiple patents. Before that, demand for Russian translations fell away following the Ukraine invasion, and the pandemic resulted in a sharp decline in patenting activity. 

The company insists that its combination of AI technology and human expertise will protect its markets. But the risk remains that AI will eat into its revenues as innovators grab market share and clients’ trust in direct AI solutions grows. 

Nevertheless, other firms could do with taking a leaf from RWS’s book and outline to shareholders how they are interpreting and integrating the immense potential of generative  and predictive AI to ensure they do not become the new Nokia to Apple’s iPhone. 

BUY: Eckoh (ECK)

The software company increased its contract revenue by over 50 per cent last year, but this has yet to come through in revenue figures, writes Arthur Sants.

Eckoh’s software secures customer payment details, so companies don’t have to worry. When a customer inputs their payment details, instead of them going through the retailer they are diverted to input their details in a separate Eckoh portal. The payment will then be dealt with and the data stored on an external cloud computer.

The benefit is that Eckoh uses Amazon Web Services and Microsoft Azure cloud computing services. This is cheaper than on-premises servers, but also the giant cloud computing companies have much better cyber security.

These benefits are clearly resonating with customers. In the year to March, total contracted business rose by 52 per cent to £52.6mn. This was driven by strong growth in North America, where contracted business rose 44 per cent to $16.8mn.

Given the timing, a lot of this new business is not yet visible in the annual recurring revenue (ARR) figure, which was up just 1 per cent. However, if the new business contracted, which is scheduled to go live soon, is included, it would represent a 14 per cent ARR increase.

This growth rate, combined with an adjusted operating margin of 22.4 per cent, up from 19.9 per cent last year, is a sign of a strong business. Anything near 40 per cent when you combine growth rate with operating margin is what analysts look for in high-quality software companies.

Broker Peel Hunt currently has Eckoh trading on a forward price/earnings ratio of 17 with a forward free cash flow yield of 4 per cent. This looks cheap, especially given the exposure to the US market.

SELL: RWS (RWS)

After a flurry of profit warnings, the specialist translation group is on track to hit its full-year forecasts, writes Jemma Slingo.

Shares in Aim-traded RWS jumped by 15 per cent after it published its interim results. Investors were clearly pleased that two of the group’s four divisions have returned to growth, and that management is confident of delivering a “stronger performance” in the second half. After a flurry of profit downgrades, the language services specialist is on track to hit its full-year forecasts, which implies flat sales and a 5 per cent fall in adjusted profits. 

RWS is still on shaky ground, however. Total sales fell by 4 per cent to £350mn in the six months to March 31 and adjusted profit before tax tumbled by 16 per cent to £45.6mn. Statutory profits —which include a £21.5mn charge for the amortisation of acquired intangibles — were significantly lower at £17.3mn. 

Cash flow deteriorated in the period, with cash conversion reaching just 30 per cent compared with 85 per cent last year. Management blamed this on a weaker business performance, planned investments and a “short-term lengthening of debtor days”. This last point is worth paying particular attention to, as it suggests customers are struggling, or reluctant, to pay their invoices. 

Cash conversion is expected to return to normal levels by the end of the year. In the meantime, however, the balance sheet has taken a slight hit. Previously in net cash, the group had net debt of £38.9mn on March 31, driven by dividend payments and share buybacks. The situation has eased following the sale of patent business PatBase for an initial sum of £25mn, but management’s commitment to a progressive dividend may come under pressure if cash remains elusive. (RWS’s dividend yield currently sits at over 7 per cent).

RWS shares trade on a forward price/earnings ratio of just seven times, compared with a five-year average of 18. According to Investec, this is the cheapest they have been since the aftermath of the financial crash. However, we remain wary of the group’s long-term prospects. Revenue is still falling in two of its divisions and artificial intelligence looks set to revolutionise translation services over the next few years. What this means for RWS remains unclear.

HOLD: FirstGroup (FGP)

Open access is growing nicely but is currently a small part of the business, writes Christopher Akers.

Public transport specialist FirstGroup boosted its full-year dividend by 45 per cent and maintained its 2025 guidance despite the growing risk that its National Rail contracts will be renationalised under a potential Labour government. 

Labour has said it will transfer contracts from train operating companies (TOCs) into a new state rail operator called Great British Railways “as they expire over the next few years or if they are broken by operators who fail to deliver for passengers”. 

This suggests FirstGroup’s Avanti West Coast, Great Western Railway and South Western Railway TOCs would be taken into public ownership when contracts end. These TOCs delivered £105.6mn in adjusted operating profit in 2024, which was up 13 per cent year on year and represented 52 per cent of total business-wide adjusted profit. 

First Rail revenue fell 4 per cent to £3.74bn on lower government-guaranteed revenues after the non-renewal of the TransPennine Express franchise in May last year, although train operators’ passenger journeys rose by 10mn to 272mn. Revenue from open-access and additional services jumped by over a fifth to £233mn on a 23 per cent rise in open-access journeys, with adjusted operating profit growing by a fifth to £37.7mn (open-access operators receive no taxpayer-funded subsidies for the routes they run, set their own fares and take on all revenue risk). 

The company runs two open-access operators — Lumo and Hull Trains — and has plans that could more than double capacity. This includes a new London to Sheffield Hull Trains service and an extension of Lumo services to Glasgow. Although open-access profits are currently less than a third of those under the TOC contracts, Berenberg analysts argue that this is where “the real growth is”. FirstGroup is also looking at new opportunities in liberalising European rail markets.

At the much smaller First Bus arm, revenue climbed 12 per cent to £1.01bn as passenger volumes rose 7 per cent. Demand was helped by a £2 fare cap in England and free journeys for those under 22 in Scotland. First Bus adjusted operating profit was up 43 per cent to £83.6mn, and management expects the division to hit its 10 per cent adjusted operating margin target in the second half of 2025. 

On a statutory basis, a £147mn charge related to the exit from two local government pension schemes drove the pivot to a pre-tax loss. 

The shares change hands at an undemanding 10 times forward consensus earnings, but there remains a significant dose of uncertainty here despite the company’s forecasts of a “normal level of variable fee awards” for its TOCs, open-access growth, and “progressive growth” at First Bus.

Information in this section is not intended to be relied on by any reader for making investment decisions. Independent investment advice should be obtained. The Financial Times Limited does not accept liability for any loss suffered as a result any such decisions.