DWF Group “positive momentum during the first two months of the new financial year” says Zeus Capital

DWF Group plc (LON:DWF) has issued a trading update showing positive momentum during the first two months of the new financial year. We are re-instating our financial forecasts assuming modest organic growth of 2% in 2021E.

  • Current trading: DWF has reported a strong start to FY21E with both revenue and EBITDA running ahead of budget and prior year. Organic revenue growth of c.6% is being complemented by contribution from acquisitions RCD and Mindcrest made in FY20 giving total revenue growth of c.21%. EBITDA is running comfortably ahead of prior year, +£3m YOY in the first two months of FY21E with gross margin maintained and cost: income ratio improving.
  • Strategic action & identified savings: A significant review of the business has been undertaken to de-risk operations and prioritise profitability and cash generation. A number of international offices are to be closed (Brussels and Singapore) or scaled back (Dubai and Cologne) with the Connected Services offering DWF Resource to be discontinued. Discontinued operations represented c.1.5% of Group revenues generating a £4.5m EBITDA loss in FY20. Previously announced annualised cost savings of £10.0m in FY21E and £13.5m in FY22E have been implemented with an additional £5.0m identified savings expected to be delivered in FY21E. Investment in growth areas in FY21 are expected to utilise c.50% of the £15.0m identified savings in FY21E.
  • Profitability a priority: Management have put in place a clear post-COVID roadmap for the company involving lock up improvements to further reduce net debt, a scale up of Managed Services as well as optimising its International operations to drive incremental revenue from existing clients. In addition, the partner hiring strategy will be based on the potential to deliver profitable organic growth with further focus on driving cost efficiencies and new working practices.
  • Outlook and forecasts: While the general economic environment no doubt remains uncertain, management have a sensible and decisive plan to improve the efficiencies and quality of earnings within the Group. We have re-instated our 2021E and 2022E forecasts with core assumptions outlined on page 2.
  • Valuation: Based on our revised forecasts, DWF Group trades on a FY20E PE of 20.9x falling to 8.6x in 2021E, which is a clear discount to the sector and a 2-year EPS CAGR of c.75% from the 2020E outturn. A decision has yet to be made on the dividend, but we anticipate some payment based on current levels of cash generation, with FCF during the first two months of the year amounting to £7m. We continue to believe DWF has a strong platform well suited to the changing legal services market, that is being right sized with a focus on quality of earnings and strong partner engagement demonstrated to date. We anticipate further detail of this recovery on 8th September alongside FY results
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