DWF Group Plc (LON:DWF) has released a trading statement for its financial year ended 30 April 2019, its maiden results following its IPO in March. Trading was positive across all divisions and broadly in line with our expectations, with marginally softer top line growth (+15% versus ZC forecast +18.1%) offset by a better than expected 0.5% improvement in the cost: income ratio (ZC forecast 0.2% improvement). Also, of note is improvement seen in cash collection, with the Group making progress against its targeted 5-10 day improvement in lock up days over the medium term. We continue to see significant growth potential for DWF, an internationally diversified legal services business of scale. Based on last closing price, the shares trade on an FY20 PE of 10.5x and yield 6.7%
Trading update: Revenue for FY19 is forecast to be no less than 15.0% higher YOY, with growth seen across all of the Group’s business areas. The core Commercial and Insurance divisions are anticipated to deliver organic growth of c. 4-5%. The newer and fast growing International and Connected Services divisions are expected to grow by no less than 70.0% and 20.0% YOY respectively. Profitability has improved YOY, with gross margin increasing by more than two percentage points, as well as a 0.5% improvement in the cost: income ratio, indicating good cost control in the core business. Net partner headcount rose by 19 YOY, driven by lateral hires. In May, DWF announced the acquisition of Polish legal services business K&L Gates Jamka, adding a further 11 partners and 45 lawyers to the Group.
Performance versus forecasts: Top-line revenue growth of c.15%, moderately below the 18.1% in our forecasts. However, this is offset by a better than expected improvement in profitability. Gross profit performance is in line with expectations, with gross margin increasing c. 2.0% year-on-year whilst the cost: income ratio improved by 0.5%, ahead of the 0.2% we forecast, implying effective cost control within the core business. Yearend net debt of £35.1m is marginally higher than our forecasts but equates to c.1.0x FY19 EBITDA as guided by management. The Group has made a ‘solid’ start to FY20, trading in line with board expectations.
Valuation: At last close, the shares trade on an April FY20 P/E of 10.5x falling to 8.3x in FY21, a discount to the wider UK listed legal services sector currently trading on an average FY19/20 PE of 16.7x. At current levels the shares offer a prospective FY20 dividend yield of 6.7%. In addition, as previously announced, the Group will pay a £3.0m dividend in relation to FY19 in September (subject to shareholder approval). Full year results will be announced on 31 July.
