- A transformed model: The impressive turnaround in performance reported in FY21A results reflects strong progress made in restructuring DWF Group plc (LON:DWF) to simplify its operating model, and to refocus on growing profitably within its core industry sectors. Under DWF’s new operating structure, which came into effect on 1 May 2021, the Group will report under three global divisions: Legal Advisory, providing premium legal advice across sectors and regions; Mindcrest, offering outsourced process-led volume legal work, and Connected Services, its range of complementary non-legal business services such as cost and regulatory consulting. This vertical segmentation of profit centres is designed to accelerate integration of DWFs global operations by allowing work to flow more freely on a global basis, and to drive growth in its Mindcrest and Connected Services divisions. We believe this new operating model is much more digestible to both clients and investors, with all three divisions complementing each other and offering meaningful cross-selling opportunities.
- Strong FY21 Results: FY21A results were in line with our forecast and reflect a material improvement in YOY performance, thanks to decisive management action to streamline divisions and control costs. Revenue growth of +13.8% to £338.1m, gross margin expansion of 2.9 ppts to 50.8% and a 2.2ppts improvement in cost: income ratio to 39.2% delivered a +57.6% rise in EBITDA to £58.2m, with organic growth and gross margin expansion across all divisions. There remains further upside from scaled back operations to be realised in FY22E, underpinning our assumptions around gross margin expansion and cost: income progression.
- Forecasts: We have upgraded our forecasts to reflect FY21 results and the positive revenue growth and margin progression delivered across the Group’s divisions. FY22E PBT of £41.1m is +3.9% ahead of prior estimates with FY23E PBT +5.8%. We also introduce FY24E forecasts for the first time.
- Valuation: DWF Group currently trades on 10.9x FY22E P/E, falling to 9.6x in FY23E. This represents a material discount to its listed peers, with an average FY1 P/E of 21.0x, (or 15.6x if we remove Keystone Law) which we believe is totally unjustifiable given the Group’s successful restructuring and current trading momentum, with organic growth of 12% in H2 FY21A. Our DCF analysis implies a valuation of 152p per share, implying 41% upside to current levels. Our intrinsic valuation takes the reinstated medium term guidance and assumes all targets are reached over the five years to FY26E. Based on this analysis, DWF would generate PBT of £72.1m with an implied equity value of £535.6m or 165p based on a PE of 15.0x. This represents upside of 53.5% above the Group’s current share price.
