- Transformation complete: Zeus Capital believes the strategic change programme unveiled by DWF Group plc (LON:DWF) management in July 2020 has been successfully executed. The business model has been streamlined with attractive organic growth opportunities identified. A focus on operational excellence has delivered a meaningful reduction in the cost: income ratio which stood at 39.1% at H1 FY22, a 130bps improvement YOY. New rigour around working capital management has resulted in a meaningful reduction in lock up days, down 15 days YOY in H1 FY22. The Group has delivered three consecutive sets of positive results, meeting market expectations, with H1 FY22 Adjusted PBT of £18.7m +39.6% YOY.
- A differentiated model: We believe DWF Group is a unique proposition amongst the UK listed law firms. It is the only firm operating on a truly global scale, capable of serving large multinational clients across jurisdictions, giving it a significantly larger addressable market. It has a powerful cross selling capability into both non-legal connected services and Mindcrest which can drive organic growth. Its exposure to the insurance and litigation sectors acts as a natural hedge against adverse economic conditions, and insurance provides a more predictable revenue stream to offset the less predictable nature of transactional work. We believe DWF’s management team have unrivalled sector experience and have now proven their ability to execute on their stated strategy, which should provide investors with increasing confidence in their ability to deliver going forwards.
- Sensible forecasts leaving headroom for outperformance: Our published forecasts imply a 3 year forward revenue CAGR of 6.7%, in the middle of the Group’s stated medium-term target of 6% to 7% with a PBT margin of 11.3% in FY22E rising to 12.6% in FY24E. We see scope for organic outperformance given strong underlying market dynamics in both the legal advisory market and the market for Alternative Legal Services Providers (ALSP) where the Group has a captive presence via its Mindcrest division. We also see potential for earnings enhancing M&A following the successful improvement in underlying cash generation and the increasing attractiveness of a plc structure to legal professionals.
- Intrinsic valuation: We have considered valuation from a range of angles, including a ‘Medium term targets’ model that presents the outcome of DWF Group achieving its stated targets, DCF modelling, regression analysis that considers the implied valuation based on comparable listed company EV/sales and PE ratings, and a sum of the parts model that looks at the upside potential of the Group’s small but growing Connected Services and Mindcrest divisions. The average of these various valuation approaches implies a market capitalisation of £690.2m, or 212.1p per share, 79.8% ahead of current levels.
