DWF Group Zeus Capital Q&A “Performed very well on multiple levels” (LON:DWF)

DWF Group plc (LON:DWF) is the topic of conversation when Zeus Capital’s Head of Research Mike Allen caught up with DirectorsTalk for an exclusive interview.

Q1: A good set of numbers from DWF Group, how do you think they’ve performed?

A1: We think the company have performed very well on multiple levels.

The trading update to April ‘21 was very strong so we saw revenue of £338 million which compared to our forecast of £339 million but that was 13% up year on year and 8% of that was organic growth so that’s a very strong performance.

Gross margin expansion we saw as well with every division progressing versus last year and we also saw a meaningful improvement in the cost income ratio so the PBT outturn is now expected to be about £34 million which compares to our £27.3 million so a strong outperformance there.

Cash generation was also very, very pleasing indeed, expected net debt is now £61 million against our prior forecast of £64.3 million. The best element of this is the free cash flow generation and there was a 20-day reduction in the lock-up as well on the working capital, which is about 10% and we thought that was a great performance.

Q2: Mike, what themes did you note in the update?

A2: Obviously, we saw the trading themes and the underlying business is performing very well from an activity revenue base, from a margin base and from a cash flow basis, as already discussed. The company’s also announced two small acquisitions as well, which shows increasing confidence.

So, the first acquisitions in Zing 365, a specialist provider of compliance training to sectors such as insurance and financial services, we think that’s highly scalable and should be a good deal for them long term.

They’ve also bought a very well established Canadian insurance business, Barnescraig and Associates as well, and we think that will fit in very well.

So, good to see them really resume M&A activity.

Q3: Now, you mentioned that the numbers have changed from your forecast, they’re a little bit higher. Does that mean that you’ve had to re-tweak it?

A3: Yes, so our ‘21 numbers have been substantially upgraded on the back of the clear guidance they gave us so for April 21, we’re forecasting a 25% earnings upgrade. Now, our numbers were slightly lower than consensus but even on consensus, that was about 15% upgrade, which is very good. Looking further out in ‘22 and ‘23, we’ve also factored in the acquisitions which triggers a 67% upgrade in those outer years.

Q4: Finally, what are your thoughts on DWF Group in terms of valuation?

A4: The company clearly made very strong progress on multiple fronts. The stock at the moment to April ‘22 is trading on a PE less than 10 times and an EV/EBITDA of 7 times and that is substantially lower than the sector average we see at the moment. Sector average is about 18 times PE and 12 times EV/EBITDA so we think there’s substantial room for re-rating.

To put it into context, the company is delivering faster than expected EBITDA growth, the organic revenue growth numbers at the upper end of the sector range as well, and they’ve also reaffirmed the dividend. That equates to a 4.7% yield in ‘21, rising to 6% in ‘22, which will be a sector-leading dividend yield as well.

So, we think there’s room for a substantial re-rating from here, given the progress they’re making on lots of different fronts.

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