Bag an 8.5% prospective yield with NAHL

NAHL targets the £3bn personal injury market, with a particular focus on claims for non-road traffic accidents and medical negligence, which accounted for three-quarters of the enquiries it received last half. Those are more complex and time consuming than 'fender-bender' cases, and typically result in higher settlements for law firms. They are also growing 15-20 per cent a year, as consumers become increasingly aware of their litigation options off the road.

Targeting higher-growth markets, together with hefty marketing investment, helped NAHL increase its first-half enquiries by 11 per cent to just short of 41,400. That rise also reflected the introduction of new consumer litigation laws in April 2013, which banned law firms from paying marketers for referrals. The result has been industry consolidation - the number of regulated claims management companies fell by 41 per cent in the year to 31 March.

NAHL has sidestepped the regulations by shifting to a cost plus margin model, in which it passes on vetted leads to a panel of law firms in exchange for them paying a portion of its monthly marketing costs and overheads, as well as a margin decided by NAHL. The amount they pay is based on their location and historic enquiry volumes.

That core business is supported by product sales, which accounted for about two-fifths of NAHL's first-half operating profits. For example, it connects 'after the event' insurers and independent medical assessment providers to its panel of law firms, in exchange for a commission.

Its innovative business model is already paying off. Strip out one-off items and discontinued products and NAHL's first-half operating profit rose 26 per cent to £6m. It also widened its margin by 4 percentage points to 27.4 per cent, and management expects it to reach 30 per cent in time. Analysts at Espirito Santo are also bullish: they have a 300p target price on NAHL's shares, and expect cash profits to rise 24 per cent to £12.5m this year, then a further 10 per cent in 2015.

True, there are major risks such as a lack of revenue visibility and vulnerability to regulatory change (the group is due to pay clients back £8.9m of after-the-event insurance commissions following the changes that occurred in April 2013). But we believe this is more than made up for by the shares' rating. NAHL's shares are flat on their IPO price of 200p and trade at only nine times this year's forecast earnings - a discount to the legal services sector average of 14 times. Moreover, they're expected to pay a 7.5 per cent yield this year, rising to 8.5 per cent in 2015.

NAHL has also erected some barriers to entry. It has invested a total of £200m in brand building over its 20-year life, and rolled out nationwide TV adverts starring its 'Underdog' character in the first half of this year. And its gains look set to continue. It's currently developing new products and services, and plans to apply its expertise in attracting customers and managing law firms to other types of legal outsourcing.