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DWF tumbles on Covid-19 update

The group is not weathering the coronavirus pandemic as well as some of its listed peers
March 30, 2020

DWF’s (DWF) shares plunged over a quarter on Friday 27 March after the law firm revealed that the coronavirus would hit activity in its final quarter, traditionally its most important. Spanning four continents, the group has global vulnerability – the ‘international’ segment accounted for over a fifth of turnover in the first half of the year. Revenue growth for the year ending 30 April is guided to fall short of management’s expectations, at 15-20 per cent.

The 28 net new partners added will now take longer to reach full revenue capacity, hampering cash generation. With fee collection set to slow, Jefferies projects that net debt will breach the banking covenant of being no more than 1.5 times cash profits (Ebitda). The group is seeking additional borrowing facilities and a “relaxation of certain covenants”.

Things are more stable at Keystone Law (KEYS). While Covid-19 could impede client demand, the group’s operational structure has sheltered it from lockdown disruption – its lawyers already operate remotely and access central services through a bespoke technology platform. Keystone ended last year with £4.4m in cash, although isn’t declaring a final dividend to preserve liquidity. A variable cost base should also offer protection – rather than fixed remuneration, lawyers are paid 60-75 per cent of case fees and only once the group has been paid.

Knights (KGH) has been similarly unperturbed, with trading to date in line with expectations for the year ending 30 April. With all employees working remotely since 13 March, the group says technology investments have minimised disruption to client services. Moving to preserve cash, it’s deferring non-essential capital expenditure and implementing salary cuts. There’s no mention of the final dividend, but balance sheet strength could enable a payout. Current consensus places full-year net debt at £17m, equivalent to one times cash profits.

Over at Gateley (GTLY), the ‘Boris bounce’ to activity has transitioned to the ‘corona-crunch’. The 2.9p interim dividend has been cancelled. The group had just £2.1m of net debt at the half-year stage, although this included £2.6m of unsecured loans due for repayment this year.