DWF Group H1 performance underpins Zeus Capital’s forecasts for the full year

DWF Group plc (LON:DWF) robust H1 performance reflects meaningful progress made against the Group’s medium-term financial and operational targets, testament to the operational transformation delivered over the last 12-18 months. 

  • H1 Results: Net revenue of £173.3m is +3.4% YOY, with LFL revenue +7% YOY. Gross margin of 51.3% is +170bps YOY, benefitting from tight cost control and restructuring in the Group’s Australian practice. Cost to income ratio of 39.1% is a 130bps improvement YOY (H1 FY21: 40.4%) resulting from strong control of overhead and scale benefits. Adjusted EBITDA of £31.3m is +26.9% YOY, with Adj. PBT of £18.7m up a massive 39.6%, reflecting the combined effect of improved gross margin and operational gearing. An interim dividend of 1.5p is in line with the Group’s stated policy of paying out 1/3 of prior year distribution (FY21 dividend: 4.5p). Lock-up of 181 days is a 15-day improvement YOY and a 5-day improvement on FY21A. Net debt of £77.2m is +£18.7m YOY but reflects £24.8m in outflows relating to Covid deferrals, deferred consideration, and one-off restructuring costs. The Group’s material improvement in profitability means its leverage ratio has improved from 1.41x to 1.19x YOY.
  • Confident outlook: H1 performance underpins our forecasts for the full year, with strong organic growth momentum combined with the normal second-half weighting of revenues. We leave our forecasts unchanged but are increasingly comfortable with full year assumptions, with outer years having upside risk. The tightening of covid restrictions announced last night are not considered to pose a risk to H2 growth, given DWF Group’s well established remote working practices, with a large % of staff having continued to work flexibly over recent months.
  • Ambitious and measurable ESG strategy: The Group has published its ESG Strategy today, setting out ambitious. science-based targets with a commitment to reducing carbon emissions and improving the Group’s diversity and inclusion (detail on page 4). Commitment to the delivery of these targets is exemplified by the inclusion of ESG objectives in the performance requirements of the Executive Directors. We believe a clearly defined ESG strategy is an increasingly important consideration to clients looking to engage DWF, and in our view the group is leading the legal services sector with this commitment to clear and measurable targets.
  • Valuation: DWF Group trade on 11.2x FY22E PE, a notable discount to listed peers on an average of 18.7x, This discount is unjustified given its rationalised strategy, and consistent execution of profitable growth over recent reporting periods. The company offers a best-in-class prospective dividend yield of 5.4% for FY22E, rising to 7.1% in FY23E.  Our DCF implies upside of 37.6% whilst our intrinsic modelling based on medium term guidance suggests 50% upside.
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