- Trading in line with 22 per cent forecast annual growth in both pre-tax profit and earnings per share (EPS)
- Memory Crystal’s cash profit margins improve from 17 to 27 per cent
- Convex Capital is working on 20 M&A deals
RBG (RBGP:89p), a professional services group that encompasses one of London’s mid-tier law firms (Rosenblatt and Memery Crystal), litigation funding arm LionFish and corporate finance boutique Convex Capital, has released a reassuring pre-close trading update ahead of half-year results on 13 September 2022.
It brings into sharp focus the valuation anomaly with sector peers. Despite trading in line with Singer Capital Markets' full-year estimates that point to 22 per cent growth in both 2022 pre-tax profit and EPS to £13.1mn and 10.9p, respectively, the shares are rated on a 2022 price/earnings (PE) ratio of 8, materially below sector peers even though trading has been robust across the board.
The acquisition of Memery Crystal in May 2021 has diversified the group’s legal services division into non-contentious areas of law, enhanced its scale and ability to win new mandates across dispute resolution (around half of revenue), and boosted cross-selling initiatives. Furthermore, the legal services’ cash profit margin of 30 per cent is expected to increase to 35 per cent in the medium term as further upside is reaped from the integration of the two legal businesses.
Convex Capital is firing, too. Having completed five deals that generated revenue of £4.2mn in the first half, the corporate finance boutique has 20 more deals in the pipeline at various stages of completion. The board expects the current macro-economic environment to support mergers & acquisition (M&A) deal flow as owners of small- and medium-sized enterprises look to cash in.
In addition, RBG’s litigation finance arm, LionFish has agreed a £20mn litigation investment arrangement with a large investment firm that gives it a share of the returns made (above a high single-digit hurdle rate) beyond its own investments. The investment firm will also invest £2mn in RBG’s existing cases. This year, LionFish expects to generate the majority of gains from potential settlements.
Singer expects group net debt of £17.2mn (equating to 28 per cent of net assets) to be reduced to £14.6mn by the year-end, falling to £11.5mn in 2023. Free cash flow yields of 13.3 per cent (2022) and 15.2 per cent (2023) support a progressive dividend policy, too, a factor not reflected in the current rating with the shares offering a dividend yield of 5.5 per cent and 7.4 per cent prospective dividend yield.
RBG shares have produced a 45 per cent return since I initiated coverage (Alpha Report: ‘Back a winning legal team’, 2 June 2020), albeit the price has drifted from the 106p level in a weak stock market since my last update (‘Seeking value opportunities’, 4 April 2022). Priced on a 50 per cent ratings discount to peers (on 2023 earnings multiples), the valuation anomaly is well worth exploiting. Buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are priced at £16.95 each plus postage and packaging.
Summer Promotion: Subject to stock availability, the books can be purchased for £10 each plus £3.95 postage and packaging, or £20 for both books plus £5.75 postage and packaging.
They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.
