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 announced a solid trading performance for H1 ’21, what were the key points that we should take note of?
A1: The half year results were for the period ended 31st October.
The revenue growth was fairly well flagged on 5th November so we saw net revenue grow at 15.4% against 14% previously flagged, within that organic growth was about 3% & it appears activity levels were approaching the pre-COVID 19 norms which is good news.
Gross margins were slightly down year-on-year by about 80 basis points but I think we saw some robust performances there given the trading conditions & obviously, that covers two national lockdowns in the period as well.
We did see underlying EBIDTA running at 17.1% ahead of last year & the cost income ratio continued to decline as well which was very good news.
Q2: How was the balance sheet looking?
A2: The balance sheet at the end of the period was £58.5 million, that showed a reduction of about £6.4 versus the year-end, the net debt year-on-year was £9 million higher than last year but that did include about £12 million of acquisition costs for RCD & Mindcrest.
The free cash flow generation was pretty strong in the period as well, free cash flow was about £19.6 million albeit there were some cost deferrals in that number. We’d expect the year-end net debt to be flat year-on-year as we expect further acquisition outflows however, the management team are looking to reduce leverage & I think that’s a key priority in the group. That will be delivered by growing profitability & holding net debt firm.
Q3: What’s the outlook like for the company?
A3: I think the group has adapted very well during the November lockdown, clearly, it’s got very agile flexible business mode which is good. They’re definitely achieving progress against the strategic objectives set by the new CEO earlier this year as well.
Good to see revenue growth & activity levels have been strong, organic growth is back in positive territory & the decisive cost measures that they’ve also taken I think are also bearing fruit on the profit line as well.
Clearly, there are still macro uncertainties, we can’t get away from that but I think the company is making very good progress against the objectives they set. If we do get a more settled economy next year then they’ll be in a good place to accelerate growth, we think.
At the moment, increase in confidence I think is good to see.
Q4: I’m guessing you made a few tweaks to your forecast?
A4: We made a couple of mixed tweaks but nothing significant in terms of headline forecasts so they remained broadly unchanged. We were just tweaking around with gross margins & cost income ratios so nothing material at the headline EPS level.
Q5: How does DWF Group look in terms of fair value?
A5: The valuation to us looks very favourable at the moment, it’s trading on an April ’21 PE of 12 times, falling to 9.8 times to April 2022 & that compares very favourably to the sector that’s currently trading on about 19 times, falling to 16 times so a sizable discount.
I think the company is in a good position to deliver above average growth & pay above an average dividend yield so we do think that valuation anomaly will correct itself over the coming months.
