DWF Group – An Investment Case for Legal Outfit

The recent £27.7m acquisition of Whitelaw Twining, a Canadian law firm specialising in insurance, commercial litigation, personal injury and dispute resolution, looks to be a cracking fit into DWF Group (LON:DWF) the UK-based legal outfit.

The announcement of the deal a couple of weeks ago was perfect timing ahead of the group declaring its interim results last Thursday, showing a resilient performance in a challenging environment.

The earnings enhancing purchase coupled with the good half-timers, saw broker upgrades identifying just how undervalued its shares are at the current 76.75p.

The Business

The £250m capitalised DWF Group, which currently employs some 4,000 people, provides integrated legal and business services in Europe, the Middle East, Asia, Australia, and North America.

It offers legal advice, commercial intelligence, and relevant industry services; products and business services that enhance and complement its legal offerings; and outsourced and process-led legal services to standardise, systemise, scale, and optimise legal workflows.

Its Operations

The company operates through three divisions: Legal Advisory Services; Connected Services; and Mindcrest.

The Legal Advisory Services division provides premium legal advice and commercial intelligence services. Its services include commercial, regulatory and data, corporate, dispute resolution, employment and pensions, insurance, real estate and tax and private capital.

Connected Services provides access to a range of products and services that complement its legal offerings. Its services include claims management and adjusting, corporate governance and compliance, costs, forensic, learning, regulatory consulting, and risk.

Mindcrest is an outsourced and process-led legal services, which standardize, systematise, scale, and optimise legal workflows. Its services include contracts management, legal analytics, and litigation and investigations. Its services include compliance, contracts management, legal analytics litigation, and investigations.

The company serves consumer, energy and natural resources, financial services, insurance, government and public, real estate, and transport sectors, as well as technology, media, and communications sectors.

DWF’s three divisions represent its single Integrated Legal Management approach through which the group can seamlessly combine any number of these services to deliver bespoke solutions to its clients with greater efficiency, price certainty and transparency.

Its Revenues

Against the group’s £350.2m revenues for the year to end April 2022, it declared a record adjusted pre-tax profit of £41.4m, which was 21% up on the year.

On a Sales per Business basis – legal advisory accounted for 83.4%, connected services 9.7% and Mindcrest 7.0%.

On a Sales per Region basis – the UK made up 71.5%, Spain 10.4%, Asia 2.5% and the Rest of the World accounted for 15.5% of turnover.

The expansion into Canada, which is seen as a strong strategic fit, which will bring greater scale, while enhancing the group’s platform into North America.

The Equity

There are some 325m shares in issue, with the group’s Employee Benefit Trust being the biggest holder with 9.18%.

Other large holders include Premier Miton (5.84%), Cartesian Capital (5.48%), Abrdn Investments (4.75%), Sand Grove Capital (2.97%), Legal & General Investment Management (2.52%), Link Fund Solutions (2.48%) and Columbia Threadneedle Assets (1.42%).

Broker’s Views – At Least Three Years of Strong Growth Ahead

It is well worth noting the comments of brokers Zeus Capital analysts Mike Allen and Rachel Birkett who consider that the group is the only truly global legal service business on the market.

They have stated that “We continue to believe DWF can deliver PBT of c£75m over the medium term, which translates to EPS of 17.3p and an implied equity value of £843.8m or 259.3p per share, assuming a normalised P/E of 15x. Overall, we see significant long-term upside to DWF as it executes its international growth strategy.“

Their estimates for the current year to end April 2023 see revenues of £387m, adjusted pre-tax profits of £45.9m and earnings of 10.8p, together with a 5.4p dividend per share.

For the coming year £430m revenues could see £54.2m profits, 11.9p earnings and a 5.9p per share dividend.

Already the analysts estimate that the 2025 year will see revenues of £451.8m, £61.1m profits, 13.4p earnings and 6.7p per share dividend.

My View – Substantially Undervalued

When it came to the Main Market in February 2019 the group was valued at £366m, with its shares being offered at 122p each.

At the start of 2022 the group’s share price hit 130.81p, since when it has been down to 67.05p, but that was before the recent Canadian acquisition news renewed investor interest.

Having scored well with my first Profile selection two years ago, it has been very disappointing to witness the sad performance of my subsequent Profile selection a year ago.

However, now at the current 76.75p and trading on a 7.1 times pe and yielding nearly 7%, I really do rate the shares as substantially undervalued.

For early 2023 I am setting a new and very easy Target Price of 100p.

(Profile 01.06.20 @ 67p set a Target Price of 100p*)

(Profile 20.12.21 @ 111p set a Target Price of 140p)

(Asterisks * denote that Target Prices have been achieved since Profile publication)