RBG’s fee earners worth backing

RBG (RBGP:147p), a professional services group that is building one of London’s mid-tier law firms (Rosenblatt and Memery Capital), and has a successful litigation funding arm LionFish and sell-side corporate finance boutique Convex Capital, is firing on all cylinders.

In the first half, Convex Capital completed eight deals and earned £5m (£0.3m in first half of 2020) in fees as mergers & acquisition (M&A) activity recovered strongly. Deal flow remains robust as SME owners look to cash in and crystallise healthy valuations. In fact, Convex’s 13 deal makers are working on 36 active deals of which nine are at various stages of completion. House broker N+1 Singer is factoring in £7m revenue contribution from Convex in its full-year forecasts, but the risk is skewed to the upside.

RBG’s legal services division delivered 10 per cent higher first half revenue of £12.7m, benefiting from a one month contribution from newly acquired Memery Crystal. It was still a strong performance as the comparative period last year included material one-off fees relating to client advisory work. More importantly, the addition of Memery Crystal has diversified the legal services division into non-contentious areas of law, enhanced its scale (139 fee earners) and ability to win new mandates across dispute resolution (53 per cent of revenue), real estate (19 per cent) and corporate work (22 per cent). Furthermore, RBG’s smart legal eagles continue to cherry pick contingent cases to fund, investing in another five in the first half. Revenue is only recognised on final judgement, thus offering earnings upside potential from the £5.7m investment in such cases.

RBG is also leveraging its core strengths through litigation finance arm LionFish. The business backs third-party litigation cases with its own capital to make strong risk-adjusted returns. It also sells off participation rights in cases as they progress, booking £3.2m of such sales last year and a further £0.8m in the first half which realised £0.5m of gains. LionFish has £8m of commitments across 10 cases (£3.2m drawn down) which on average last three years.

Having pushed through 10 per cent and 36 per cent profit upgrades for the 2021 and 2022 financial years (‘Targeting companies on the upgrade’, 3 June 2021), house broker N+1 Singer expects RBG to deliver pre-tax profits of £9.1m and £13m, respectively, on revenue of £45m and £56m. On this basis, expect 2021 and 2022 EPS of 7.9p and 11p to support dividends of 4.8p and 6.58p, respectively, implying the shares are priced on a modest 2022 price/earnings (PE) ratio of 13.3 and offer a prospective dividend yield of 4.5 per cent.

By comparison, law firms DWF (DWF), Keystone Law (KEYS), Gateley (GTLY), Ince (INCE) and Knights Group (KGH) are priced on an average PE ratio of 17.7 for 2022, and professional services/corporate finance firms FRP Advisory (FRP), Begbies Traynor (BEG) and K3 Capital (K3C) trade on an average 2022 PE ratio of 15.3.

The shares have produced a 121 per cent return since I initiated coverage (Alpha Report: ‘Back a winning legal team’, 2 June 2020), and I maintain my 175p target. Buy.

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