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Back a high-yielder on the upgrade

A professional services group has released an eye-catching pre-close trading update that prompted analysts to push through 14 per cent earnings upgrades
Back a high-yielder on the upgrade
  • 2021 pre-tax profit and EPS estimates upgraded 14 per cent to £10.4m and 9p
  • Second half-year dividend of 3p declared to lift annual payout to 5p a share
  • 2022 forecasts imply 22 per cent earnings growth and 30 per cent dividend growth

RBG (RBGP:128p), a professional services group, has released an eye-catching pre-close trading update that prompted analysts to push through earnings upgrades of 14 per cent. The group’s activities encompass one of London’s mid-tier law firms (Rosenblatt and Memery Capital), a nascent litigation funding arm LionFish and successful sell-side corporate finance boutique Convex Capital. Trading has been robust across the board.

The acquisition of Memery Crystal in May 2021 has diversified the legal services division into non-contentious areas of law, enhanced its scale (139 fee earners) and its ability to win new mandates across dispute resolution (around half of revenue). It has also added real estate and corporate client work, such as IPOs, to the enhanced client offering, both segments being in high demand last year.

Moreover, the legal services’ net profit margin of 29 per cent is expected to rise to 35 per cent in the medium term as the benefits of the integration of the businesses comes through. Analysts at house broker Singer Capital Markets have taken note, pencilling in 40 per cent higher divisional cash profit of £13.4m on a third higher revenue of £45.2m in 2022.

Convex Capital is firing on all cylinders, too, having completed 14 deals that generated revenue of £9.4m and an estimated cash profit of £4m in 2021. With fees mergers & acquisition (M&A) deal flow robust as SME owners look to cash in and crystallise healthy valuations, there is no shortage of work for Convex’s 13 deal makers who are currently working on 22 active deals at various stages of completion. Singer is looking for a flat profit performance from Convex in 2022, which looks conservative to me.

RBG’s litigation finance arm leverages its legal eagle’s expertise by cherry picking client cases to back as well as directly funding third-party litigation cases. LionFish completed four investments last year and has made total capital commitments of £10.5m across 10 cases (£3.6m drawn down) since May 2020. There have been £6.4m of disposals, too. Singers expect the division to report a cash profit of £3m in 2021, a level that it should match over the next two financial years.

On this basis, expect group revenue to rise 20 per cent to £56.2m in 2022 and a further 10 per cent to £62m in 2023 to drive up pre-tax profit to £13m and £15.7m, respectively. Singer’s EPS estimates of 11p (2022) and 12.4p (2023) support a hefty rise in the respective payouts to 6.57p and 7.4p, implying the shares are trading on a 2023 forward price/earnings (PE) ratio of only 10 and offer an attractive prospective dividend yield of 5.9 per cent. A double-digit free-cash-flow yield for both forecast periods is supportive of the anticipated ramp up of the dividend as well as a £3m pay down of RBG’s current net debt of £14.2m by the end of 2023.

Having initiated coverage at 68p (Alpha Report: ‘Back a winning legal team’, 2 June 2020), RBG’s share price got within pennies of hitting my 175p target last summer before succumbing to profit taking. That process has run its course. Buy.


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