DWF Group (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: DWF Group recently completed their acquisition of Spanish law firm, RCD and since then, you’ve reiterated your report on the company. What are the key points to the company in terms of an investment case?
A1: We think there’s multiple attractions to the DWF story at the moment.
First of all, we think there’s a lot of latent capacity in the business, particularly around new partner hires and also, we believe that the infrastructure is very well invested. So, as that capacity starts to grow and generate more revenue, we think its attractive operational gearing characteristics in the business which we will see will come through in the second half of the year. So, we’re quite excited about the growth potential and the margin expansion as it become more efficient and benefits from the improvement in the infrastructure.
Secondly, in terms of working capital, we do believe that the business is on track to significantly improve debtor days. Again, there’s quite a lot of process involved there, which is good news, around billing and cash collection but we think that’ll be an attractive part of the story as well.
Clearly, they’ve bought the RCD Spanish legal business which we think is a good addition to the portfolio and should be a good platform for growth in Latin America. So, we’ve upgraded our future forecasts on the back of that by about 4-5% over the next 12 months.
So, yes, we do see a number of attractions for the investment case at the moment.
Q2: So, you’ve changed your forecasts, what is it that’s changed?
A2: The change in forecasts is purely down to the RCD acquisition so we’re increasing our April 2020/21 numbers by about 5% on the back of that.
We have made some modest tweaks in mix in terms of better than expected growth in insurance and a little bit of flatness in commercial as well.
Q3: Finally, what’s your view on DWF Group’s valuation?
A3: The stock at the moment trades on less than 12x April 20 PE which we think looks very cheap in the context of its peer group where the average is closer to 17x on a prospective basis. Also, if you put the yield into the equation, dividend yield of about 6%, and that’s a progressive dividend yield so we think that will grow in line with earnings as well.
So, we do think the valuation looks attractive from a growth perspective, a peer comparison perspective and a cash flow and dividend yield perspective as well.
