DSW Capital – a very cash generative and highly scalable business

This recently quoted group is looking out for ambitious, entrepreneurial accountancy professionals who want to start their own businesses.

DSW Capital (LON:DSW) will give them a platform upon which to start and develop, backed with DSW’s various services.

The Business

The company was set up way back in 2002 by three ex-KPMG corporate finance advisers – James Dow, John Schofield and Mark Watts.

In 2008 the company’s management came up with a very simple concept. That was to ‘licence’ out and create the ability for high calibre accountants from the ‘Big 4’ accountancy firms who wanted to get going on their own.

The company offers such start-up businesses the ability to operate under the Dow Schofield Watts name, in return for a licence fee of 14.7% of their revenue. Licensee partners then retain some 85% of their revenues.

The proposition was particularly appealing to accountants who were unfulfilled, under-rewarded, had good contact networks and wanted to run their own business.

The group is part of a partnership network of mergers and acquisitions advisory firms operating across the globe.

That gives access to overseas buyers, investors and local knowledge, which allows DSW clients the opportunity to tap into a pool of acquisition targets and advisors in supporting overseas expansion.

Una Validiores

The Warrington-based DSW offers start-up capital, provides support such as regulatory guidance, gives a base level of drawings, as well as access to DSW’s own contact network, together with cross referrals.

As a basic franchise model, the concept was certainly not new, but the DSW framework has proved to be an attractive proposition.

Today there are 20 licensee businesses with 88 fee earners, across seven offices in England and one in Scotland, operating under the DSW banner.

The licensees trade primarily under the Dow Schofield Watts brand. Its services offered includes Corporate Finance Advice, Financial Due Diligence, Equity Finance, Investment and Funding, Specialist Tax Services, Wealth Advisory, Forensic and Valuation Services, Business Planning and Tech Sector.

It provides advisory services and funding to growth companies across the technology and media sectors.

The group’s offered services cover a range of sub-sectors including information technology services, software development and platforms, media agencies, digital gaming, hardware and telecoms.

Following on from an end January announcement from the company, it has expanded its service lines by way of two leading asset-based lending specialists, providing due diligence and risk management services across multi-asset classes to support lending decisions and ongoing support and advice to advisers, investors and their portfolio companies.

The group motto of ‘una validiores’ – which means ‘we are stronger together’ – is particularly appropriate.

This platform is fast becoming a mid-market challenger professional services network, which is ‘disrupting’ the traditional way of accounting professional service firms.

Have you guessed yet what I really like?

Of course, regular readers by now will have sussed what I like about this company.

The scalability about the business just helps to really drive up the annual recurring revenues, which is immensely important for such a ‘franchise-type’ business.

As more licences are sold off and the number of fee earners increase, so too will the group’s revenues.

What is more – the group has a very high operating margin.

The Equity

The group came to the market in mid-December 2021, when it Placed 5m new shares @ 100p each to raise £3.78m net of expenses, to help to fund the company’s future growth.

There are some 21,387,508 shares in issue.

The three founders and their family interests talk for some 46% of the equity, while other team members hold another 20%.

AXA Investment Managers UK currently own 600,000 shares, representing 2.79% of the equity.

Trading Update

On 10 May the group issued a Trading Update for its year to end March 2022.

Subsequent to its IPO last December, the group has continued to trade strongly and it expects both revenue and adjusted pre-tax profits to be ahead of market expectations. 

Revenue of £18.3m (£15.3m) is significantly ahead of market expectations and 19.6% ahead of the prior year.  

James Dow, CEO stated:

“These results are underpinned by the significant market demand for DSW’s expert service lines and our performance illustrates the considerable benefits of our platform model, which empowers ambitious professionals to seize the opportunities in the market. 

“The autonomy and flexibility which the DSW model gives to Fee Earners is a true differentiator in our market and we believe that it will continue to attract high quality professionals seeking greater flexibility in a post-Covid world.”

Broker’s View

Research analysts Rachel May and Jamie Murray, at the group’s brokers Shore Capital, estimate that its actual fee revenue for the last year will have risen from £2.5m to £2.8m, upon which adjusted pre-tax profits could be £1.9m (£1.8m), worth 8.8p in earnings and paying a 6.2p (nil) dividend per share.

For the current year they foresee £3.3m of revenues, £2.2m profits, 8.1p earnings and a 5.8p dividend per share.

As far ahead as the year to end March 2024 Shore Capital goes for £3.8m revenues, £2.6m profits, 9.1p earnings and a 6.5p dividend per share.

My View

I expect this group to be highly acquisitive in this specialist sector. As corporate finance specialists, I would also expect it to show earnings enhancing purchases helping to rapidly build-up its total proposition.

It operates on a very healthy profit margin which, as its scalability shows through, will drop more to the bottom line, that will probably help it to quickly outshine broker’s estimates.

The group, which will be showing at the Mello 2022 investor conference on 25 May, will be announcing its final 2022 results on 14 July.

The shares, which touched 129.94p soon after going public, closed last night at around the 122.5p level.

I now set a Target Price of 150p on the shares.