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Zeus Capital

DWF Group “well placed to deliver on the promises made at IPO” says Zeus Capital

DWF Group (LON:DWF) has announced a robust HY20 trading update, which confirms it is on track to hit our FY expectations. We maintain our forecasts, and believe the Group is well placed to deliver on the promises made at IPO.

  • HY20 trading statement: DWF has released a trading update for its half year ended 31 October 2019, essentially confirming it continues to trade in line with expectations. Revenue growth is said to be not less than 10% and is mainly organic driven by International and Connected Services (aided by litigation) as anticipated. Net debt of £49.5m is down £9.5m from the same period last year, and in line with expectations for the period. Normal cyclicality of partner tax payments in addition to the £3m dividend payment are reflected in this, and the Group remains confident in achieving its working capital management targets previously flagged. We are particularly pleased with the lock up days reducing by two from the April 2019 position, showing good progress to its 5-10 day medium term target. WIP days have increased by 15 days, which is part of its normal seasonal cycle, with a reduction of 17 debtor days showing significant improvements in credit control. The dividend payment is also consistent with its stated dividend policy and our forecast assumptions.
  • Key drivers: Insurance and Commercial Services has delivered combined organic growth in excess of 5% (ZC 6% and 8.5% respectively FY 2020E), with International increasing by 29% (ZC FY 2020E 50%) and Connected Services 18% (ZC 25%). Given the steady increase in net partner headcount of 20 on a full-time basis, and its healthy lateral hire pipeline (UK and overseas), we anticipate growth to be H2 weighted during the year. This has clearly been a busy period for the Group as it launched in Poland, expanded in Germany, won a significant contract with BT and delivered a robust UK performance (particularly in Insurance and Litigation) despite the uncertainty UK economic backdrop.
  • Forecasts:We are maintaining our forecasts at this juncture, albeit accept there is an H2 bias as we have seen in previous years, mainly due to the timing and phasing of investment. We also believe DWF Group is on track to deliver our forecasts on net debt on an underlying basis, assuming no M&A activity takes place. We understand there is a pipeline at present of “carefully chosen targets being assessed for feasibility.” We remain comfortable with our medium term “blue sky” investment case for the Group achieving 60% gross margins, 40% cost to income ratio and c£100m EBITDA particularly with its strong counter cyclical offering.
  • Valuation: The shares continue to look undervalued to us trading on a 2020E P/E of 11.5x falling to 8.8x in 2021E, which is a 30.2% and 39.1% discount to the wider Legal Services sector. An FY20 yield of 6.1% also continues to look highly attractive.

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