- Reported pre-tax loss of £13.3mn after impairments
- Adjusted pre-tax profit of £0.4mn
- Exit from all litigation funding matters
- Focus on deleveraging balance sheet
- Previously downgraded full-year guidance maintained
The hefty first-half loss reported by professional services group RBG (RBGP:21p) had been flagged after the new management team announced they were exiting all of the group’s conditional fee arrangements and damages-based arrangements (‘Litigation funders LCM and RBG digest court ruling’, 27 July 2023).
Encompassing London’s mid-tier law firms Rosenblatt and Memery Crystal and corporate finance boutique Convex Capital, under previous management RBG had invested in 13 legal cases with a carrying value of £13.3m. The complete write-off of these litigation assets partly reflects the fact one case in which RBG had invested £9.3mn is now unlikely to deliver a positive outcome. It also reflects the new board’s decision to simplify and de-risk RBG’s balance sheet. Any successful outcome on the remaining cases will be booked as revenue in proportion to the stakes retained in the individual cases.
Even ignoring the hefty impairment charges, which resulted in net asset value falling 15 per cent to £52.3mn (55p), RGB’s profits would still have reversed. Although the legal services business delivered a resilient performance in the face of weak economic conditions, underlying revenue fell by 4 per cent to £19.8mn, which led to a lower profit contribution. Convex Capital only completed one transaction and reported a small loss – a £2.4mn profit reversal on the first half of 2022. This explains why group adjusted cash profit fell from £7mn to £2.9mn.
Convex's performance will be critical if RBG is to achieve full-year cash profit forecasts of £10mn in the seasonally stronger second half. The board is confident the business will complete some of the 22 transactions in its pipeline, so analysts at brokerage Singer are factoring in second-half divisional revenue of £3.4mn and cash profit of £1.7mn based on five deals being converted. They are also predicting a £2.2mn higher second-half cash profit contribution from the group’s legal services division.
This still means that the full-year result will be materially lower than in 2022, hence the forecast decline in annual pre-tax profit from £11.8mn to £5.6mn.
Low rating and re-rating potential
That said, with the shares trading on a forward price/earnings (PE) ratio of 4.7 and enterprise value (including IFRS 16 leases) to cash profit multiple of 5.5 times, the bad news looks priced in.
A full-year contribution from the seven new partners hired since April coupled with ongoing fee earner recruitment should drive a better performance in 2024 when Singer predicts mid-teens growth in group pre-tax profit and EPS to £6.6mn and 5.2p, respectively. A refinancing of borrowings ahead of the April 2024 facility renewal date would be a positive catalyst, too.
So, although I am maintaining a hold recommendation for now, the shares have re-rating potential once there is clear evidence RBG has turned the corner. Hold.
■ 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 at £16.95 each plus P&P of £3.75, or £25 plus P&P of £5.75 for both books.
