DWF Group is significantly undervalued says Zeus

DWF Group plc (LON:DWF) has announced it is on track to deliver our FY22 adjusted PBT forecast despite some challenges particularly on utilisation during H2. Lock up days also continue to fall, and we sense increasing confidence in delivering medium-term strategic growth, reflected in a growing M&A pipeline. We continue to believe DWF is significantly undervalued, and the current valuation is at odds with its execution to date, strong growth outlook and sector leading dividend.

¨ Trading update: DWF Group has issued a reassuring trading update for its year end to April 2022. Adjusted PBT is in line with our forecast and is >20% higher than the prior year showing the ongoing strategic progress the Group continues to make. Further reductions in lock up days have also been made at 180, a 6 day reduction YOY. Confidence in medium term guidance provided in July 2021 has been reiterated.

¨ Key themes: Looking at revenue in more detail, strong activity levels continued into H2 with organic growth running at 6%. The UK was a standout performer delivering 9% growth during the period. Despite high activity levels, which we see as a strong pre cursor for growth in FY23 and beyond, utilisation did prove to be more challenging in H2 due to COVID absences and a build-up of holiday. We believe the holiday cliff edge has now passed and would expect utilisation to bounce back from here. Indeed, Q4 revenue exit run rate of 8% gives us confidence here. Despite these headwinds, adjusted PBT has been held and implies a 2pp increase in margin to 12% as strong margin and cost control came through. In addition, an agreement with Hauzen, an independent law firm in Hong Kong has been reached extending the global network of associations. A significant pipeline of M&A opportunities are also under consideration, which we see as a sign of confidence in management’s ability to reduce leverage and execute its medium term strategic plan.

¨ Forecasts: On the back of this update, we are tweaking our revenue assumptions to reflect H2 utilisation rates previously discussed. We have flowed this through into FY23 and FY24, which could prove conservative. However, we are holding our adjusted PBT and EPS forecasts in each year due to the strong margin and cost control evidenced to date. Our FY22 net debt assumptions have been reviewed and were below the previous Group guidance of £65-70m, which has been maintained. The increase in our net debt forecast stems from payment deferrals, which are not expected to occur from FY23.

¨ Investment view: We believe DWF Group remains substantially undervalued both against its peers and intrinsically vs. its medium-term targets. In our last note ‘Growth, income, quality earnings’ we considered the valuation from a number of different angles, and remain comfortable with our intrinsic value target of 212p per share. While there are some economic headwinds and utilisation issues facing DWF, we believe the current management team is building a strong track record of execution and a FY23 P/E of 9.4x backed with a yield of 7.5% is at odds with this and vs. a wider Legal services sector on a P/E of 17.3x, yield of 3.6%. FY results are expected on 21 July,

Summary financials

Price103.0p
Market Cap335.1m
Shares in issue325.4m
12m Trading Range97.2p – 130.0p
Free floatc.40%
Next EventFY22 Results. 21 Jul

Financial forecasts

Yr end Apr (£’m)2021A2022E2023E2024E
Revenue338.1350379400.2
y.o.y growth (%)13.83.58.35.6
EBITDA58.265.570.876
Adj. EBITDA46.153.558.864
Adj. PBT34.24146.651.7
EPS (p) ful dil. adj7.49.811.211.9
DPS (p)4.55.97.88.3
Net (debt)/cash60.268.558.949.2
P/E14.110.69.48.8
EV/EBITDA8.77.66.86.1
Div Yield (%)4.35.67.58

Source: Audited Accounts and Zeus Capital estimates

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