DWF Group “significant long-term upside” says Zeus

DWF Group plc (LON:DWF): A record year of strategic progress

¨ FY22 Results: Results were well flagged at a trading update in May. Net Revenue of £350.2m is +3.6% YOY, with LFL growth of 7%. Adjusted PBT of £41.4m is +21.1% YOY reflecting a 170bps increase in PBT margin to 11.8%. Adjusted EPS of 10.7p was +45% YOY, delivering sector leading growth in profitability, reflecting strong progress made in operating efficiencies. DPS of 4.75p is progressive, +5.6% YOY (FY21A: 4.5p) but below our estimate of 5.9p. Net debt of £71.8m is £11.6m higher YOY, driven by catch up payments of COVID-19 VAT deferrals as well as acquisition related payments totalling £14m. Leverage of 1.08x is higher than prior year (FY21A: 1.04x) due to the benefit of COVID-19 deferrals which have no unwound.

¨ Capital efficiency: The Group has delivered further improvement in working capital efficiency with lock-up days falling to 179 days (FY21: 184 days). This compared to our forecast of 180 and medium-term target of 170 days.

¨ Resilient end markets: We believe over half of DWF’s revenue is generated from insurance and less cyclical areas of law and business services, where demand is more stable than in transactionally focused verticals such as corporate law, which should minimise earnings volatility through the cycle.

¨ Differentiated global model: DWF continues to grow its international footprint through affiliations and associations, with three such agreements announced year to date (NGA, RTS and Hauzen). With the Group’s transformation plan well executed, there is increased focus on potential M&A with a healthy pipeline of opportunities under consideration. The legal services sector remains highly fragmented with significant scope for further consolidation.

¨ Current trading/ outlook: The Group remains confident in its medium-term guidance of delivering robust growth, strong cost control and efficient working capital management. Balance sheet leverage is within its targeted range, which could lend itself to further M&A activity for the appropriate transactions. The Group is mindful of more challenging macro economic conditions, albeit remains confident due to its defensive model and strong position in areas such as litigation and Insurance.

¨ Forecasts: We are maintaining our headline FY23 and FY24 earnings forecasts following these results. We revise our DPS and net debt assumptions to reflect FY22 results. We also introduce our FY25 forecasts for the first time, which now shows a 4-year EPS CAGR of 14.7%, which we believe is compelling, based on conservative medium-term targets.

¨ Valuation considerations: DWF Group currently trades on 8.9x FY23 P/E falling to 8.3x in FY24 and 7.7x in FY25. This continues to represent a discount to the sector despite delivering on its strategy, sector leading EPS growth, above average yield and improving working capital management. Our valuation per share is 154.3p based on a number of techniques from DCF, SOTP and derived peer analysis (see Exhibit 7 for detail). We continue to believe DWF can deliver PBT of c£75m which translates to EPS of 17.3p and an implied equity value of £843.8m or 259.3p per share, applying a P/E of 15x. Overall, we see significant long-term upside to DWF at this juncture and believe the potential rewards of ongoing strategy execution continue to significantly outweigh any potential risks.

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