DWF Group “solid trading performance delivered in H121 underpins our forecasts” says Zeus Capital


DWF Group plc (LON:DWF) has announced solid trading for H121. Group revenue is +14% YOY with activity levels returning towards pre-Covid norms and decisive cost management delivering a 40% improvement in both H1 EBITDA and PBT YOY.

  • HY21 Trading update:  DWF has updated on trading for the first half of FY21, the six months ended 31 October 2020. Revenue growth of c.14% YOY reflects a reassuring recovery in activity close to those seen pre-Covid, with underlying business returning to growth, as well as positive contribution from FY20 acquisitions DWF-RCD (completed 20 December 2019) and DWF Mindcrest (completed 2 March 2020). The Group’s decisive cost reduction initiatives are bearing fruit with improvements seen in both gross and net margins. The cost income ratio for H121 has improved by c.3% versus both H120A and FY20A. This has driven an impressive +25% growth in EBITDA YOY with H121 adjusted underlying PBT of £13m close to the £13.8m delivered for FY20A as a whole. We highlighted the Group’s compelling Managed Services proposition in our previous note (15th September) and are encouraged by confirmation that this offer continues to gain traction and will be reported as a separate division from FY21 onwards.
  • Balance sheet: Net debt of £59m has reduced some £6m from that reported at FY20A year end, despite £12m in acquisition consideration paid in the period Improvement in net debt has been aided by ongoing progress in cash collection with lockup days (which reflects debtors and unbilled WIP) improving c.5 days YOY and c.10 days versus the FY20 year-end position. Management of lockup days is a key strategic priority for the Group, and it is pleasing to see meaningful progress being made with each day of improvement representing c.£1m in cash generation. The Group declared a final dividend for FY20A of 0.75p on 8th September and we anticipate an update on dividend expectations for FY21E at interim results on 10th December.
  • Forecasts: We believe the solid trading performance delivered in H121 underpins our forecasts with management cautiously optimistic for H2. We leave our forecasts unchanged reflecting the heightened uncertainty on near term trading as the UK enters its second national lock down today but will review our estimates at interim results on 10th December when we have greater clarity over ongoing restrictions. Our net debt assumption for FY21E consider Covid-19 related tax deferrals expected to be paid in H2 FY21E.
  • Valuation:   At last night’s close the DWF Group trades on an FY21E PE of 12.0x falling to 9.6x in FY22E, a notable discount to its peer group average of 15.5x with a sector leading prospective dividend yield of 5.8% rising to 7.3% in FY22E.
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