DWF Group Plc (LON:DWF) is the first legal services business operating on a global scale to come to the public market. The legal services market offers a significant and compelling growth opportunity for DWF, and we believe its innovative and differentiated offering leaves it well positioned to continue its strong growth profile. The business is underpinned by longstanding client relationships and a ‘business as usual’ proposition that meets their everyday legal needs, generating a stable and repeatable revenue stream. It also benefits from exposure to high margin, counter-cyclical litigation work which accounts for c.65% of Group revenue. At current market value the shares trade on an FY19 P/E of 17.7x, falling to 10.6x in FY20 representing an attractive discount to its listed peers. The cash generative nature of the business and an expected 70% pay-out ratio translates to a c.6.6% FY20 dividend yield, rising to c.8.4% in FY21. Based on management’s medium-term targets we believe the Group is capable of generating £100m+ EBITDA, implying an intrinsic value of more than £1bn in the future.
A unique offering: DWF is a fast growing and increasingly internationalised mid-market legal services business, bridging the gap between large global “Magic Circle” law firms and smaller regional legal businesses. Its unique offering not only encompasses the complex legal work of a traditional law firm but extends to a complementary range of managed and connected service solutions catering to the repeatable ‘business as usual, end to end’ legal requirements of its clients, giving earnings a degree of predictability.
Compelling market opportunity: The market opportunity is significant, with the UK legal market worth £33bn alone. The wider Global Legal market is valued at £653bn and expected to reach £778bn by 2021. We believe there is also a much broader market opportunity beyond this for DWF’s non-legal, Managed and Connected Services. The legal services market has consistently grown above global GDP and looks set to continue to benefit from ongoing regulatory changes, a shift towards greater outsourcing, continuous technological development, global clients increasingly internationalising and a trend in consolidating supply chains, in what remains a highly fragmented market.
Attractive financials: We believe DWF’s financial profile is compelling and forecast a three-year revenue CAGR of 14.4% from FY18 to FY21 which represents a slight acceleration on the 12.5% CAGR seen in the three years to FY18 with growth front-loaded as the newly established parts of the group accelerate their early stage expansion. Our forecasts are supported by solid growth in H1 FY19, both in revenue (+18.3%) and gross margin (+270bps on a Zeus Capital (ZC) adjusted basis), creating good momentum into full year FY19 and FY20. As a cash generative business with minimal capital requirements, DWF anticipates distributing c.70% of PAT as a dividend.
Valuation: At last close, the shares trade on an April FY19 P/E of 17.7x falling to 10.6x in FY20. We have considered a range of intrinsic valuation methodologies, including peer group multiples, DCF, DDM and FCF Yield. The average share price outcome based on these techniques points towards an intrinsic value of 213p per share, implying upside of 77.5% from current levels. In addition, our Blue-Sky analysis based on management targets suggests the Group is capable of generating £100m+ of EBITDA over the medium term, which we believe implies an intrinsic value of more than £1bn
