DirectorsTalk Interviews

Tag: DWF

  • DWF Group “organic growth returning back to positive territory” says Zeus Capital

    DWF Group “organic growth returning back to positive territory” says Zeus Capital

    DWF Group plc (LON:DWF) has announced solid trading for H121. Group revenues were well flagged and slightly higher than indicated +15% YOY with activity levels returning to pre-Covid norms and decisive cost management delivering a 23% improvement in H1 PBT YOY.

    • HY21 results:  H1 results for the period ended 31 October were well flagged on 5 November, albeit with net revenue slightly higher at 15.4% vs. the c14% flagged. Within this, organic growth was 3% with activity levels approaching pre-COVID-19 norms. Gross margins were -80bps at 49.6% YOY, albeit adjusted EBITDA was +17.1% ahead at £24.7m driven by the cost income ratio continuing to decline (40.4% vs. 41.7%).  Adjusted PBT was £13.4m and compared to £10.9m last year and was broadly in line with the FY 20 performance at £13.8m.
    • Balance sheet: Net debt at the end of the period was £58.5m and reflects a reduction of £6.4m vs. the year end. The net debt figure YOY is £9m higher due to £12.4m of consideration paid in relation to the acquisitions of RCD and Mindcrest. FCF generation was £19.6m and compares to the £9.2m outflow last year, albeit there is a benefit of cost deferrals in this number. The year end net debt position is expected to be flat YOY with further deferred considerations expected to flow through in H2. Reducing leverage will remain a key priority for the Group, and in the near term this is expected to be delivered by growing profitability and holding net debt firm
    • Outlook: The Group appears to have adapted well during the November lock down and is achieving progress against the strategic objectives set by the Board earlier this year. Revenue growth has been strong and it’s good to see organic growth returning back to positive territory. The decisive cost measures are also bearing fruit and have allowed DWF to deliver a robust H1 performance, which is broadly in line with the FY position last year in PBT terms. Whilst there are clear uncertainties at present, DWF is making good progress and a more settled economy could well allow this to accelerate next year. In the meantime, we believe the tone of “increasing confidence” is an encouraging stance to take in the current environment.
    • Forecasts & Valuation: We have revised our forecasts to reflect H1 divisional mix and a better than expected gross margin performance. This is offset by a more cautious view on cost to income ratio and higher interest charges for the year leaving our PBT forecasts broadly unchanged. At last night’s close DWF Group trades on an FY21E P/E of 12.2x falling to 9.8x in FY22E, a notable discount to its peer group average of 18.7x with a sector leading prospective dividend yield of 5.7%.
  • DWF Group Analyst Q&A “looks attractive in the context of its growth” (LON:DWF)

    DWF Group Analyst Q&A “looks attractive in the context of its growth” (LON:DWF)

    DWF Group plc (LON:DWF) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.

    Q1: DWF Group have released their first half results for the six months ended 31st of October, can you just talk us through the key points?

    A1: So, the company announced a very solid trading update for the first half of the year. Revenue growth was about 14% and that reflected their reassuring recovery and activity close to levels we saw pre-COVID which was good. Underlying business also returned to growth and there was also a good positive contribution from acquisitions such RCD last year as well, and also Mindcrest.

    The decisive cost reduction initiatives were also bearing fruit in this update as well and we’ve seen good margin improvement so the cost income ratio continues to improve and that really drove an impressive 25% growth in EBITDA year-on year.

    So, a combination of factors really, which is delivering the strong growth at the moment.

    Q2: Has this meant that you’ve changed your focused in any way?

    A2: No, so clearly the underlying signs are encouraging but we decided to leave our forecast unchanged at the moment, just given the uncertainty we’re seeing across the economy at the moment. We will have a good look at those assumptions when they report their H1 results in December and hopefully we’ve just got a little bit more clarity as well.

    Q3: How is the balance sheet looking at the moment?

    A3: Yes, balance sheet is looking good so that continues to come down, don’t forget, there’s about £12 million of acquisition consideration paid in the period so I think the fact that we see net debt of about £59 million, which was a£ 6 million reduction from the year end, we felt was a good sign.

    Lock-up days, managing those is a key strategic priority for the group and it was also pleasing to see some good progress being made there as well, which should help the cash generation.

    Q4: Finally, just in terms of valuation, how do you see DWF Group?

    A4: Valuation, to us, looks attractive, particularly I think given the commentary that we seeing on trading at the moment. So, stocks trading on about 12 times April ‘21 earnings falling to 9.6 in 2022, EV/EBITDA of 8.6, falling to 7.1 and we’ve got a dividend yield this year of about 5.8 which we think will increase to 7.3 to April 2020. So, it looks attractive to us in the context of its growth but also its peers.

  • DWF Group look attractive in terms of growth and against peers (Analyst Interview)

    DWF Group look attractive in terms of growth and against peers (Analyst Interview)

    DWF Group plc (LON:DWF) is the topic of conversation when Mike Allen, Head of Research at Zeus Capital joins DirectorsTalk. Mike talks us through the key points from the company HY21 trading update, explains how this effects the forecast, takes a look at the balance sheet and share his view on the company in terms of fair value.

    DWF Group is a global legal business with a different mindset: we disrupt to progress.

    Named by The Financial Times as one of the most dynamic new legal businesses, its innovative, forward-thinking approach is transforming legal services. Their outstanding sector specialists, approach to innovation, and advanced working practices translate into an entirely new way of working, providing access to traditional legal and alternative legal services in one integrated, agile offer that reflects the way modern global companies work and what clients need. The goal is to provide a complete legal business solution for its clients driven by an agile work culture that attracts diverse, exciting people.

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

    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.
  • DWF Group “a stable platform on which to grow” says Zeus Capital

    DWF Group “a stable platform on which to grow” says Zeus Capital

    Post DWF Group plc (LON:DWF) results we consider key takeaways from the presentation and introduce our FY23 forecasts for the first time. YTD trading shows a clear recovery with the full benefit of operational gearing still to come through. We are confident that recent initiatives to streamline operations have left DWF with a strong and better managed platform on which it can deliver significant future growth.

    • Strong momentum seen in Q1 FY21: Trading YTD is encouraging with progress made across all key performance metrics and a strong pipeline of future work. Q1 FY21 revenue of £84.3m is up 20% YOY including 5% organic growth with revenue per partner improving 6% YOY to £228k. Notable improvement in the cost to income ratio, which fell to an average of 38.7% in Q1, an impressive 7 ppts lower than the comparative prior year period, has resulted in a material uplift in Group profitability in the first quarter. Underlying adjusted EBITDA (pre-IFRS 16 basis) of £9.7m is +145% YOY with Underlying adjusted PBT of £7.4m +231%. This means that YTD the Group has already delivered over 50% of the full year FY20A PBT with this momentum being carried into Q2.
    • Platform to drive significant profitable growth: We believe steps taken to rationalise the Group, with underperforming business discontinued and operations streamlined, has created a stable platform on which to grow. This is reflected in the solid trading momentum seen year to date and the impressive improvement in cost to income ratio. On initiation we illustrated a blue-sky scenario that saw the Group reaching c.£100m in EBITDA over the medium term. Whilst some operational challenges and the unprecedented disruption resulting from Covid-19 has pushed this trajectory out, we believe there is a clear track to the Group achieving c£75m in EBITDA, with notable upside potential from cross selling, further productivity gains and potential M&A activity.
    • Forecasts: Our headline FY21E and FY22E are largely unchanged, albeit with some minor adjustments resulting from a shift in divisional mix. We have also introduced FY23E forecasts today, taking a conservative view on top line revenue growth and cost to income ratio expansion with the potential for management to outperform. Exhibit 6 below presents a summary of changes. 
    • Valuation: We believe DWF Group’s value is undemanding versus its UK listed peers (summarised in Exhibit 7), trading on 10.3x FY1 P/E falling to 8.3x in FY22. The Group has reaffirmed its commitment to its stated dividend policy of distributing up to 70% of earnings to shareholders, with a final dividend of 0.75p announced in its final results release. This translates to an attractive forwards yield of 6.8%, rising to 8.5% in FY22E based on our forecasts.
  • DWF Group “has a strong platform well suited to the changing legal services market” says Zeus Capital

    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.
  • DWF Group reports strong trading for Q1 2021

    DWF Group reports strong trading for Q1 2021

    DWF Group plc (LON:DWF), the global legal business, has announced a trading update for the first quarter of FY21.

     Unaudited*Unaudited*Unaudited*
    £mFY21 Q1FY20 Q1Change
    Net revenue84.370.120.3%
    Gross profit41.535.417.2%
    Gross profit margin (%)49.2%50.5%-1.3 ppts
    Underlying adjusted EBITDA9.74.0144.7%
    Underlying adjusted PBT7.42.2231.4%
    Reported PBT-0.61.9-133.9%
    Net debt (excluding IFRS 16)(55.2)(48.3)14.3%

    *Source: July 2020 Management Accounts

    FY21 TRADING UPDATE

    • Strong trading for the first three months of FY21 with revenue of £84.3m reflecting growth of 20% and Underlying adjusted EBITDA of £9.7m reflecting growth of 145% vs. prior year.
    • Organic revenue growth of 5% yoy and total revenue growth of 20% reflecting the contribution from the acquisitions of RCD in Spain and Mindcrest
    • Previously announced cost savings of £15m in FY21 are taking effect and are reflected in the significant uplift in EBITDA versus prior year, with cost to income ratio trending at 38% compared to 45% in the prior year 
    • Disposed, closed or reduced scale of operations in Cologne, Dubai, Singapore and Brussels with further measures taken post year-end to rationalise underperforming units
    • Net debt of £55.2m reflecting a £9.7m reduction on the April 20 position and reflecting free cash flow generation of £18.5m for the first three months of the year
    • Lock up days reduced from 206 at April 2020 to 200 at the end of Q1 reflecting trading conditions returning to normal
    • Significant bid activity and new contract win with multinational insurance company, Aviva
    • Our Net Promoter Score with key clients is very positive at 50, and 47 overall, based on 403 clients providing feedback
    • Strong pipeline of opportunities including Managed Services bid activity supports optimism for the FY21 outturn, subject to overall market conditions
    • In addition to proposing a final dividend for FY20, moving forward the Board remains committed to its stated dividend policy of a payout ratio of up to 70% of Adjusted Profit after Tax.

    Sir Nigel Knowles, DWF Group Chief Executive Officer commented:

    “Trading through the majority of FY20 was strong and the Group made significant investments to support its growth objectives. The sudden and far reaching impact of COVID-19 had a material effect on the final quarter with a resulting impact on profitability. Despite this, we delivered a solid performance with overall revenue growth of 10.9% and organic growth of 2.0%. While we achieved record Group revenue, with an organic growth rate that compares to other global law firms in FY20, it was lower than expected.

    “The strength and resilience of the Group and our differentiated model has been evident in the first three months of FY21. We have seen strong activity levels generating positive momentum across the business resulting in revenue and EBITDA being materially ahead of the prior year.

    “We have also taken decisive action focused on consolidating our existing operations to increase profitability, delivering cost efficiencies and improving lock-up and cash generation. Measures to scale-up Managed Services and optimise the International division will position DWF well for FY21 and beyond. Having spoken with many of our stakeholders, I am very pleased that our new focus has such strong support and remain positive about DWF’s future prospects.”

    BOARD APPOINTMENTS

    Further to the appointment of Jonathan Bloomer as Non Executive Chairman and Chris Sullivan taking on the new role of Deputy Chairman with effect from 1 August 2020, the Board is pleased to announce the following appointments with effect from 22 October 2020:

    • Matthew Doughty as Group Chief Operating Officer of DWF Group plc.  Matthew Doughty will step down as Partner Director at the same time; and
    • Following a thorough internal recruitment process, Michele Cicchetti and Seema Bains as Partner Directors of DWF Group plc.  The position of Partner Director is designated by the Board as a Non-independent, Non-Executive Director position. A Partner Director represents the partners of DWF Law LLP and DWF LLP and is therefore a partner shareholder representative on the Board.
  • DWF Group appoints Jonathan Bloomer as Chairman and Chris Sullivan as Deputy Chairman

    DWF Group appoints Jonathan Bloomer as Chairman and Chris Sullivan as Deputy Chairman

    DWF Group plc (LON:DWF), the global legal business, has announced that, following a thorough recruitment process, Jonathan Bloomer will join the Board as Chairman with effect from 1 August 2020. When Sir Nigel Knowles became CEO and the Board commenced the process to find a new Chairman, Chris Sullivan stepped up as Interim Chairman. Chris will now take the role of Deputy Chairman, also from 1 August 2020. Chris will continue to act as Senior Independent Director.

    Jonathan Bloomer is Chairman of Morgan Stanley International, Arrow Global Group Plc and SDL Group Limited. He has previously held a number of board positions including Chairman of the JLT Employee Benefits Group, Senior Independent Director of Hargreaves Lansdowne Plc, Non-Executive Director of Railtrack Plc and Director of Egg Plc. From 2006-2012, Mr Bloomer was European Partner at Cerberus Capital. Between 2000 and 2005, he was Group Chief Executive Officer of Prudential Group plc, having previously served as Deputy Group Chief Executive Officer and Group Finance Director. Prior to his time at Prudential, Mr Bloomer held senior roles at Arthur Andersen. Jonathan is a Fellow of the Institute of Chartered Accountants in England and Wales.

    Tea Colaianni, who chaired the Nomination Committee for the recruitment process, commented:

    “I am delighted that Jonathan has been appointed as our new Chairman. With his wealth of experience as a Chairman and non-executive director, he brings in-depth knowledge of spearheading businesses and driving change.”

    Jonathan Bloomer, incoming Chairman, commented:

    “I am pleased to take on the role of Chairman of DWF, the only Main Market listed global legal business, at this exciting stage of the Company’s development. I look forward to working with the Board and the refreshed management team implementing the very clear strategy set out by Sir Nigel aimed at taking DWF forward to a new phase of sustainable and profitable growth.”

    Sir Nigel Knowles, CEO of DWF Group, said:

    “Jonathan joins the Board at an important time so his seniority and extensive experience in both executive and non-executive roles across a wide range of businesses will be extremely welcome. I am also extremely happy that Chris will become the new Deputy Chairman. Chris will continue to play a pivotal role in listening to and engaging with DWF partners globally and helping to ensure that we maintain strong and effective lines of communication between the partners and the Board. We look forward to continuing to work with Chris and welcoming Jonathan on board as we continue to build on our leading position as a provider of Complex, Managed and Connected services.”

  • DWF Group “positive momentum during the first two months of the new financial year” says Zeus Capital

    DWF Group “positive momentum during the first two months of the new financial year” says Zeus Capital

    DWF Group plc (LON:DWF) has issued a trading update showing positive momentum during the first two months of the new financial year. We are re-instating our financial forecasts assuming modest organic growth of 2% in 2021E.

    • Current trading: DWF has reported a strong start to FY21E with both revenue and EBITDA running ahead of budget and prior year. Organic revenue growth of c.6% is being complemented by contribution from acquisitions RCD and Mindcrest made in FY20 giving total revenue growth of c.21%. EBITDA is running comfortably ahead of prior year, +£3m YOY in the first two months of FY21E with gross margin maintained and cost: income ratio improving.
    • Strategic action & identified savings: A significant review of the business has been undertaken to de-risk operations and prioritise profitability and cash generation. A number of international offices are to be closed (Brussels and Singapore) or scaled back (Dubai and Cologne) with the Connected Services offering DWF Resource to be discontinued. Discontinued operations represented c.1.5% of Group revenues generating a £4.5m EBITDA loss in FY20. Previously announced annualised cost savings of £10.0m in FY21E and £13.5m in FY22E have been implemented with an additional £5.0m identified savings expected to be delivered in FY21E. Investment in growth areas in FY21 are expected to utilise c.50% of the £15.0m identified savings in FY21E.
    • Profitability a priority: Management have put in place a clear post-COVID roadmap for the company involving lock up improvements to further reduce net debt, a scale up of Managed Services as well as optimising its International operations to drive incremental revenue from existing clients. In addition, the partner hiring strategy will be based on the potential to deliver profitable organic growth with further focus on driving cost efficiencies and new working practices.
    • Outlook and forecasts: While the general economic environment no doubt remains uncertain, management have a sensible and decisive plan to improve the efficiencies and quality of earnings within the Group. We have re-instated our 2021E and 2022E forecasts with core assumptions outlined on page 2.
    • Valuation: Based on our revised forecasts, DWF Group trades on a FY20E PE of 20.9x falling to 8.6x in 2021E, which is a clear discount to the sector and a 2-year EPS CAGR of c.75% from the 2020E outturn. A decision has yet to be made on the dividend, but we anticipate some payment based on current levels of cash generation, with FCF during the first two months of the year amounting to £7m. 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 demonstrated to date. We anticipate further detail of this recovery on 8th September alongside FY results
  • DWF Group “well positioned longer term” says Zeus Capital

    DWF Group “well positioned longer term” says Zeus Capital

    DWF Group PLC (LON:DWF) has issued a trading update, indicating that its Commercial business has been hit by COVID-19, with International also not growing to our expectations. While we believe DWF remains capable of delivering its medium-term guidance implying an attractive long-term investment proposition, the earnings downgrade of 34% is no doubt disappointing. We are suspending our forecasts from 2021E, with the 2020E dividend under consideration.

    Trading update: DWF has announced a trading update indicating that the key period of Q4 has been impacted by COVID-19. The financial performance of 2020E was always H2 weighted due to a variety of factors due to natural seasonality, timing of investment (particularly lateral hires in which 28 additional partners have been hired on a net basis) as well as latent capacity in the business that has not been utilised due to the disruption caused by COVID-19. The business clearly benefits from diversification both in terms of geography and activity, with areas such as litigation likely to remain stable through the cycle. Cost savings have been accelerated across the Group, with £10m expected to be delivered in cash savings in 2021E and £13.5m in 2022E on the back of this. Double digit growth in revenues and profits will be delivered in 2020E despite this disruption in its most critical period.

    Divisional trends: As expected International and Insurance will drive the growth in the Group, with International driving the strongest growth with revised revenue growth of 44.7% ahead of its medium term CAGR guidance of 35% to 40%. Insurance is also trading ahead with its strong counter cyclical offering. Connected Services is also expected to deliver growth. The adverse impact has been felt in Commercial, which is now expected to be flat with corporate and real estate all said to have been impacted by COVID-19 albeit offset partially by litigation.

    Impact on forecasts: Following revised guidance for 2020E, we are cutting our revenue forecast by c3%, which is largely driven by cutting back our International growth assumptions (we are now assuming 44.7% vs. 58.7%).The impact on adjusted EBITDA is much more severe and downgraded by 28% due to the lower activity in Q4 with the investment in costs already made in H1 as previously flagged. The impact on EPS is 34% with central costs and interest largely fixed. Net debt is also significantly impacted and we anticipate a 40% increase in net debt to £70m as we take a more cautious view on working capital as guided. We would hope this is short term in nature, and post COVID-19 medium term working capital goals can be achieved. The current core RCF in place is £80m (with additional facilities) and DWF expects to operate within this and the relationship with lenders remaining strong. Based on our revised forecasts, 2020E net debt/EBITDA is running at 1.8x. Clearly M&A activity for the foreseeable future is off the agenda. The dividend will be determined once the FY20 results are known and carries a cash cost of £11m for 2020E.

    Investment view: While this is no doubt disappointing, as things normalise, we do believe DWF Group is well positioned longer term through its International reach Managed Services and counter cyclical offering. We also believe it remains unique in terms of its competitive position to drive disruptive change in the Legal Services markets.

  • DWF Group Capital Markets Day

    DWF Group Capital Markets Day

    DWF Group (LON:DWF) hosted a Capital Markets Day yesterday, focused on two of its growth engines; its Managed Services proposition and its International growth strategy. We believe Managed Services is a clear differentiator of DWF’s proposition that has been largely overlooked since IPO. The acquisition of Mindcrest acts to meaningfully accelerate its Managed Services offer, with yesterday’s presentation highlighting the significant revenue opportunity that exists within this space. In turn, the Group continues to execute its international strategy with deals in both Poland and Spain complete, and new markets of interest identified. 

    • Significant Managed Services opportunity: The Managed Services platform aims to deliver day-to-day, process driven law in an efficient way though harnessing both technology and lower cost delivery models including the Group’s newly acquired offshore capabilities in Pune, India. DWF’s ability to offer its managed services in conjunction with complex law advice is a genuine market differentiator and was central to its success in winning the BT contract, that none of the other 25 companies that tendered were able to match. The long term contracted nature of managed services relationships produces sticky, recurring revenue and helps to cement relationships with large corporate clients, exemplified by BT’s five-year contract. Significant cross selling opportunities exist alongside internal cost synergies. We believe Managed Services has the potential to represent up to half of Group revenue over the long term, as increasing amounts of volume, process- driven work is identified, standardised and automated. A foothold in India also gives the Group insight into the regions quickly evolving legal tech market, a key focus for the Group in driving innovation and disruption in the legal services market.
    • International growth: Since listing DWF has established a presence in Poland and more recently Spain, through the acquisition of RCD; both markets identified as targets at IPO. The Group’s tried and tested model for international expansion is client led, with new target markets identified for the next phase of its global growth, including Portugal and Canada. Its association model allows it to establish close working relationships with international partners, best exemplified in its US association with WSHB, a highly innovative legal business which we believe would be a highly complementary acquisition for the Group in the future.
    • Valuation: Trading on FY20 P/E of 12.5x falling to 8.7x in FY21, with a prospective yield of 5.6% DWF offers multiple drivers of growth through international diversification and market disruption. In addition DWF Group has significant latent capacity which we believe it can translate into meaningful fee income growth which should drive medium term margin expansion.
  • DWF Group Acquisition of Mindcrest Inc

    DWF Group Acquisition of Mindcrest Inc

    DWF Group (LON:DWF) is to acquire leading legal and managed services business Mindcrest Inc. The deal is expected to deliver ‘significant synergies’ within its existing business and provides a platform on which the Group can rapidly grow its Managed Services offering, which we see as a key differentiator of the DWF model. Total consideration of £14.2m includes cash (£7.7m) and shares (£6.5m) with the Group also assuming £1.6m of net debt on completion. DWF is hosting a Capital Markets Day later today where it will present further detail on its Managed Services and International Strategies as well as todays deal.

    • About Mindcrest: Mindcrest offers legal and managed services including litigation support, contracts, compliance and legal analytics for large international corporate clients. It is headquartered in Chicago and employs 360 people, largely based in Pune, India with additional offices in New York and London. In the year to December 2019 it generated sales of US$12.1m (£9.2m) and normalised EBITDA of $1.2m (£0.9m).
    • Transaction details: Consideration of US$18.5m (£14.2m) consists of initial cash consideration of $2.4m (£1.8m) and shares of $8.5m (£6.5m) payable on completion with a further $7.6m (£5.9m) in deferred cash consideration to be phased over a period of six months. The Group will also assume US$2.1m (£1.6m) of net debt on completion. This equates to an EV of 17.6x trailing 12-month EBITDA of $1.2m (£0.9m) prior to recognising significant synergies, estimated to generate annual cost savings of £2.9m by FY22. Assuming full synergies are realised this equates to 4.2x FY22 post-synergies EBITDA. Share consideration is subject to lock-in period of two years with a 24-month clawback on post-tax cash paid to Mindcrest management in the event they resign.
    • Change to forecasts: Based on conservative assumptions discussed in detail over the page, we believe the acquisition will be EPS neutral in FY21 as work is transitioned to the new model and earnings enhancing in FY22 with EPS +3.0% versus our prior forecasts. Today’s acquisition significant accelerates the Group’s managed services strategy, enhances bid quality and widens the Group’s product offering. We believe there is strong and clear potential for the Group to covert the enhanced managed services capabilities this deal brings into new revenue opportunities that could exceed our forecasts.
    • Valuation: Trading on FY20 P/E of 12.3x falling to 8.6x in FY21, with a prospective yield of 5.7% DWF is the only main market listed legal services business offering international diversification. As highlighted in our last note (Multiple Attractions, published 21 January 2020), DWF Group has significant latent capacity which we believe it can translate into meaningful fee income growth which should drive medium term margin expansion.
  • DWF Group Analyst Q&A with Zeus Capital (LON:DWF)

    DWF Group Analyst Q&A with Zeus Capital (LON:DWF)

    DWF Group (LON:DWF) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.

    Q1: DWF Group recently completed their acquisition of Spanish law firm, RCD and since then, you’ve reiterated your report on the company. What are the key points to the company in terms of an investment case?

    A1: We think there’s multiple attractions to the DWF story at the moment.

    First of all, we think there’s a lot of latent capacity in the business, particularly around new partner hires and also, we believe that the infrastructure is very well invested. So, as that capacity starts to grow and generate more revenue, we think its attractive operational gearing characteristics in the business which we will see will come through in the second half of the year. So, we’re quite excited about the growth potential and the margin expansion as it become more efficient and benefits from the improvement in the infrastructure.

    Secondly, in terms of working capital, we do believe that the business is on track to significantly improve debtor days. Again, there’s quite a lot of process involved there, which is good news, around billing and cash collection but we think that’ll be an attractive part of the story as well.

    Clearly, they’ve bought the RCD Spanish legal business which we think is a good addition to the portfolio and should be a good platform for growth in Latin America. So, we’ve upgraded our future forecasts on the back of that by about 4-5% over the next 12 months.

    So, yes, we do see a number of attractions for the investment case at the moment.

    Q2: So, you’ve changed your forecasts, what is it that’s changed?

    A2: The change in forecasts is purely down to the RTCD acquisition so we’re increasing our April 2020/21 numbers by about 5% on the back of that.

    We have made some modest tweaks in mix in terms of better than expected growth in insurance and a little bit of flatness in commercial as well.

    Q3: Finally, what’s your view on DWF Group’s valuation?

    A3: The stock at the moment trades on less than 12x April 20 PE which we think looks very cheap in the context of its peer group where the average is closer to 17x on a prospective basis. Also, if you put the yield into the equation, dividend yield of about 6%, and that’s a progressive dividend yield so we think that will grow in line with earnings as well.

    So, we do think the valuation looks attractive from a growth perspective, a peer comparison perspective and a cash flow and dividend yield perspective as well.

  • DWF Group’s Multiple Attractions (Analyst Interview)

    DWF Group’s Multiple Attractions (Analyst Interview)

    DWF Group (LON: DWF) is the topic of conversation when Mike Allen, Head of Research at Zeus Capital caught up with DirectorsTalk. Mike talks us through the key points to the company in terms of an investment case, the changes to a revised forecast and shares his view on the company’s valuation.

    DWF Group is a global legal business providing complex, managed and connected services, operating from 31 key locations with approximately 3,900 people. The Company became the first Main Market Premium Listed legal business on the London Stock Exchange in March 2019. DWF recorded revenue of £272.4 million in the year ended 30 April 2019.

  • DWF Group “management delivering ahead of expectation” says Zeus Capital

    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.
  • DWF Group’s Acquisition to enhance earnings by around 6% say Zeus Capital (Interview)

    DWF Group’s Acquisition to enhance earnings by around 6% say Zeus Capital (Interview)

    DWF Group plc (LON: DWF) is the topic of conversation when Mike Allen, Head of Research at Zeus Capital joins DirectorsTalk. Mike shares his thoughts on the groups half year results, talks us through the strategic progress made, explains how the acquisition of Spanish law firm RCD will benefit the company, any changes to the forecast and Mikes thoughts on the company valuation.

    About DWF Group plc

    DWF is a global legal business providing complex, managed and connected services, operating from 28 key locations with approximately 3,200 people. The Company became the first Main Market Premium Listed legal business on the London Stock Exchange in March 2019. DWF recorded revenue of £272.4 million in the year ended 30 April 2019.

    About RCD

    Founded in 2003, RCD is a leading provider of comprehensive legal advice and has over 20 legal and sectoral areas of expertise. With a team of over 400 professionals led by 40 partners, it ranks among the top Spanish law firms. RCD has been recognized for the past four years for its innovative capacity in the European ranking Financial Times FT – Innovative Lawyers. The firm has offices in Madrid, Barcelona and Valencia. For more information visit: www.rcd.legal

  • DWF Group Interim Results & Acquisition of RCD

    DWF Group Interim Results & Acquisition of RCD

    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.