DWF Group Interim Results & Acquisition of RCD

Zeus Capital

DWF Group (LON:DWF) has released solid H1 results and appears to be making good progress on achieving its strategic objectives set out at IPO. The Group has also announced the acquisition of leading Spanish law firm RCD, its largest M&A transaction to date. Our underlying forecast assumptions are unchanged today, albeit with the UK Insurance business making up for the softness seen in Commercial Services. We will revise numbers to reflect the announced acquisition on completion of the deal but based on conservative assumptions expect it could add c.6% to FY21 EPS.  On an FY1 PE of 11.0x and a prospective dividend yield of 6.3% we see current levels as an attractive entry point.

  • H1 results: H1 results were well flagged following the trading statement last month, and in line with our expectations. Group revenue is up 10% YOY to £146.8m (H119: £133.4m) including 7% organic growth and contribution for the acquisition of Poland which is performing well. Underlying EBITDA of £13.5m is up 4% YOY. This reflects a 1.1% decline in Group gross margin to 50.2% (H119: 51.3%) as a result of investment made in the first half which we believe will drive meaningful growth in H2 and should deliver year on year improvement in underlying gross margin for the full year. There was a 70-basis point YOY improvement in the cost to income ratio of 43.0% and we anticipate a further improvement for the full year as the platform supports higher revenues in H2.
  • Key drivers: There is positive revenue contribution from all four divisions, including a 28% increase in International revenue, 18% grow the in Connected Services, an impressive 10% increase in the more mature Insurance division and a flat performance from Commercial Services against a challenging market backdrop, where good demand for litigation was offset by weakness in transactions and reduced partner headcount in Real Estate. Working capital management remains a key focus for the Group with a target of reducing its gross lock up days by 5-10 days over the medium term. The Group is on track to achieving this goal, having delivered a two day decrease in gross lock up to 201 days (H119: 203 days), driven by a reduction in debtor days offset by increased WIP. Management are confident of delivering further lock up improvements in H2.
  • Forecasts: We leave our underlying forecast assumptions unchanged although acknowledge a greater weighting to Insurance over Commercial Services within the core UK business. We will revise our forecasts to reflect todays announced acquisition but believe based on conservative assumptions in line with RCD’s 2018A performance the deal could increase FY21 EPS by c.6%.
  • Investment view: DWF remains the only listed legal services business operating with international scale and now present in 28 locations across 14 jurisdictions. The defensive nature of its positioning is reflected in the strong performance of litigation and insurance in the period, despite a softer backdrop in commercial legal services. We remain confident that DWF will achieve its medium-term strategic objectives and continue to believe DWF can self-fund itself to a £100m+ EBITDA business with an attractive progressive dividend yield also on offer for investors.
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