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DWF Group "management delivering ahead of expectation" says Zeus Capital

In this note we reiterate our investment case for DWF Group (LON:DWF), built on multiple drivers of profitable growth including a significant amount of latent capacity existing within new partner hires and the Group’s well invested infrastructure. We believe management are delivering ahead of expectation on working capital improvements with potential to over achieve against the medium-term target of a 5-10-day improvement in lock-up days. We also present our revised forecasts, reflecting an adjustment in divisional mix following the strong H1 performance in the Insurance division, as well as contribution from the recently acquired (completed 20 December 2019) RCD, a leading Spanish law firm, as well as IFRS 16. Trading on FY20 P/E of 11.9x falling to 8.4x in FY21, with a prospective yield of 5.9% DWF is the only main-market listed legal services business offering international diversification.

  • Latent Capacity: A key driver of our investment case is the significant latent capacity that exists within DWF’s current business model, notably in its fast-growing International business. We believe, once established, International can generate average revenue per partner on a par with the Group’s mature Commercial and Insurance divisions. Based on average revenue per partner of £540k generated across Commercial and Insurance in H1 FY20, against £272k average H1 revenue per partner in International, this suggests the ability for International to almost double (+98%) its billings from current levels, equating to up to £65 million in additional annual revenue.
  • H2 weighting: We acknowledge the degree of H2 weighting that exists within our forecasts but point to significant investment made in H1, including sunk costs associated with the setting up of the large Managed Services contract with BT, investment in International markets including the Dusseldorf launch, expansion in Australia and new hires in Poland, as well as the natural seasonality in the business that sees a higher level of billing generated in the second half against a flat cost profile.
  • Change to forecasts: We have revised our forecasts to reflect a shift in mix between Insurance (+10% YOY) and Commercial (flat YOY) seen in H1, as well as the acquisition of Spanish law firm RCD, completed December 2019. The acquisition of RCD makes Spain the largest of the Group’s international markets, bringing an addition 40 partners and 400 people into the Group. The deal is earnings enhancing in its first full year to April 2021, increasing EPS by c.5% based on conservative assumptions in line with RCD’s 2018A performance.
  • Valuation: Trading on an FY20 P/E multiple of 11.9x we see potential for DWF Group shares to rerate as it delivers against its forecasts, monetises its latent capacity and continues to execute earnings enhancing M&A activity.

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