DWF Group – Mega Cheap On A 10.86% Yield And 5.43 P/E
DWF Group (LON:DWF) states that its vision is to be the leading global provider of integrated legal and business services.
Proudly it claims to listen to its clients and that there is a growing desire for legal and business services to be delivered in an easier and more efficient way.
Accordingly, it has built its business and designed its range of services on that principle.
The Business
The group has three main offerings – Legal Services, Legal Operations and Business Services – which we can combine to deliver bespoke solutions for clients.
The Management consider that this single Integrated Legal Management approach delivers greater efficiency, price certainty and transparency without compromising on quality and service.
It has approximately 4,000 people and offices and associations located across the globe.
Its Legal Services offerings include premium legal advice and commercial intelligence services including commercial, regulatory and data, corporate, dispute resolution, employment and pensions, insurance, real estate and tax and private capital.
Its Legal Operations include outsourced and process-led legal services, which standardise, systematise, scale, and optimise legal workflows including compliance, contracts management, legal analytics litigation, and investigations.
Business Services provides access to a range of products and services that complement its legal offerings including claims management and adjusting, corporate governance and compliance, costs, forensic, learning, regulatory consulting, and risk.
The company serves the consumer, energy and natural resources, financial services, insurance, government and public, real estate, and transport sectors, as well as the technology, media, and communications sectors.
FY23 Trading Statement
At the end of May the group issued an Update for the year to end April 2023.
It stated that it expected to report over 8% growth in net revenues at about £380m, while looking to remove over £15m of cost in the current year to end April 2024, helping ‘to protect the business from broader inflationary cost-pressures’.
CEO Sir Nigel Knowles stated that:
“Our performance continues to show how robust a business we are, even in a challenging environment.
We have delivered consistently strong revenue growth and underlying organic growth, with the initial benefits of our cost control programme also coming through.
Our transaction in Canada has also given us great momentum in North America, which is a geography that continues to be of high importance to our future growth story.
In combination, this gives us a high degree of optimism as we begin FY24.”
Why Invest In DWF?
The group declares that it is an attractive proposition with a model designed to perform through the cycle providing integrated legal and business services through its differentiated platform.
It states that the $750bn global legal services market is growing at 5% annually and it is transforming in a technology driven era, with the alternative legal services market growing at 15%.
DWF offers a unique, modern and integrated services platform.
It is a global business with multi-jurisdictional expertise.
The company has developed predictable, recurring and diverse revenues which sit alongside a quality mergers and acquisitions track record.
The experienced and diverse management team is focused upon growth.
At the heart of everything that the group does it has teams of talented and incentivised experts.
The Equity
There are some 342m shares in issue.
The larger holders include Abrdn Investment Management (7.80%), Premier Fund Managers (5.47%), Cartesian Capital Group (5.21%), Link Fund Solutions (3.99%), Sand Grove Capital Management (2.83%), Columbia Threadneedle Asset Managers (1.36%), and Janus Henderson Investors (1.18%).
Andrew Leaitherland holds 2.29%, while The DWF Group Plc Employee Benefit Trust holds 7.63%.
Broker’s View – Value Range 119p To 160p A Share
Analyst James Bayliss at Berenberg has retained his ‘buy’ recommendation and has a price objective of 160p on the stock.
He noted that the group’s shares had underperformed despite posting a ‘reassuring’ full-year update last month, while being down some 33% for the year-to-date.
The analyst stated that:
“We struggle to understand the severity and direction of this reaction, noting management’s reiteration of its confidence in the future; its low balance sheet gearing; its exposure to annuity-like, defensive earnings; and its significant asset-backing through the group’s case book and working capital.”
Analysts Rachel Birkett and Mike Allen at Zeus Capital note that the group’s growth is accelerating, while its costs are controlled.
For the last year they have estimates out for revenues of £380.0m (£350.2m) while adjusted pre-tax profits could have risen to £44.1m (£41.4m), generating earnings of 10.4p (10.7p) but increasing its dividend to 5.2p (4.8p) per share.
For the current year they see £430.3m revenues, £54.2m profits, 11.9p earnings and a very healthy 5.9p dividend per share.
Their estimates for the year to end April 2025 are for £451.9m revenues, £61.1m profits, earnings of 13.4p and a 6.7p per share dividend.
They have a rating range out for the group’s shares of 119p – 142.3p a share.
My View – Possibly One Of The Cheapest Quality Stocks that I have seen for quite a while
I have no embarrassment returning to Profile this group again, simply because its shares are cheap!
The end April results should be published within the next month, along with a more positive outlook for the group.
As far as I can see this group’s shares are significantly undervalued and could easily double within the next year.
It is a quality company, whose shares trade on an extremely low price-to-earnings ratio of just 5.43 while offering an incredibly attractive 10.86% yield.
These shares should be trading alongside, if not at a premium to, its peers.
That alone would see them doubling in price from last night’s closing price of just 56.5p.
(Profile 01.06.20 @ 67p set a Target Price of 100p*)
(Asterisks * denote that Target Prices have been achieved since Profile publication)
Is there really *no one* offering thoughts on why this share has performed so terribly this year? It is down 30% since Mark Watson-Mitchell last profiled DWF on 4 Jan 2023,
For example, Citywide story a2418267
in May reports Liberum downgrading DWF to “sell” because an equity raise may be needed to prevent it from breaching it’s debt covenants. Analyst James Allen reduced his target price from 80p to 50p on the stock, which knocked the SP hard. He said: ‘A trading update from the group suggested net revenues are in line but pre-tax profits were ‘”likely 5% below our estimate and further below consensus”. Management remains confident in the outlook, but ambitious year-on-year profit before tax growth of 25% makes full-year 2024 estimates look stretched’.
He added that net debt is also expected to be ‘much higher than our estimate of £80m at £95m, indicating poor cash generation” and that this has become a trend. ‘We think DWF was close to breaching covenants in the period and, given the strong implied growth in full-year 2024, we believe this could deteriorate further and an equity raise could be required.’ He said that the ‘covenant could come under pressure if revenues were to miss by just 3%’.
Has DWF done or said anything to counter this scepticism over its debt and cash position? The most recent Trading Update apparently said very little about profit, which is worrying as regards the sustainability of the 10% dividend and the control of debt.
This may well be a bargain but I am concerned why none of the partners has been net a buyer if this is really so cheap. In fact, every RNS I can see related to director dealings has either been for sales or for free shares being handed out to them. Not one solitary market purchase. Ever. Surely partners / directors should be putting their own money where their mouth is? I also note that the EBT has been a net seller all year. It’s a shame because the story sounds good. But I would have to see management self belief to buy in personally.
Of course what this article doesn’t say is that these were last recommended at around 79p at the end of 2022 since when they have dropped 30%. And doubling from here would only just bring them to the 2020 target again.