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DWF Group “has a strong platform well suited to the changing legal services market” says Zeus Capital

DWF Group plc (LON:DWF) final results were well flagged in the last trading update, with adjusted EBITDA coming in slightly ahead of our forecast. The decision to pay a final dividend in an exceptional year is a sign of confidence in the improving financial performance in the business evidenced by Q1 trends. We are not changing our underlying headline assumptions at this juncture, but believe a recovery is well underway.

  • Final results: Revenues were +10.9% ahead YOY but marginally below our forecasts. Adjusted EBITDA (pre IFRS 16) came in slightly ahead of our forecast, with gross profits also ahead at £142.2m (ZC £137.6m) despite being marginally down YOY. Adjusted PBT (excluding acquisition related gains and expenses, share based payments and non-underlying charges) came in at £13.8m vs. our forecast of £11.1m and £20.3m last year. Net debt (core bank debt) came bang in line with our forecast at £64.9m.
  • Dividend decision: Based on the stronger than expected recovery in Q1 2021, the board is increasing the dividend pay-out ratio to c.90% to allow a final payment of 0.75p. This was not factored into our forecasts, and we believe should represent a positive surprise. In addition, we believe this also underscores confidence in the financial outlook as well as its ability to execute its growth strategy so should be taken as a positive sign in our view. We are assuming the pay out ratio goes back to normal levels from FY 21.
  • Q1 trading off to a strong start:Its encouraging to see Q1 trading off to a strong start with net revenues +20.3% (organic growth of 5%) and underlying adjusted EBITDA +144.7% to £9.7m vs. £4.0m in Q1 last year and equating to 43% of FY20A EBITDA . The full benefits of the cost rationalisation have yet to come through, with margins recovering following a lack of activity during Q4 impacted by COVID-19. FCF generation has also accelerated to £18.5m on an underlying basis, with net debt down £9.7m vs. last year, which we also view as encouraging.
  • Forecasts: We are maintaining our headline forecasts on the back of this update and are not changing our assumptions despite the encouraging Q1 trends given the uncertain economic outlook. This is something we are likely to review in more detail at the H1 stage.
  • Investment view: DWF Group trades on a FY21E PE of 8.6x falling to 6.8x in 2022E, which is a clear discount to the sector and a 2-year EPS CAGR of c.75% from the 2020E outturn. We continue to believe DWF has a strong platform well suited to the changing legal services market, that is being right sized with a focus on quality of earnings and strong partner engagement.

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