Time to question RBG’s recovery

Annual results from professional services group RBG (RBGP: 10p) made for grim reading. The reported pre-tax loss of £11.4mn included a raft of exceptional items including a £5.6mn hit on the disposal of its litigation funding arm, LionFish, £2mn of write-offs on receivables, a £0.8mn re-financing charge, a £0.3mn onerous contract provision and £2mn of other one-off costs. Adjust for these items and the group still reported an underlying pre-tax loss of £0.7mn, having reported an adjusted pre-tax profit of £7.6mn in 2022. The hefty loss excludes a further £13.7mn below-the-line impairment charge associated with discontinued operations, which also contributed to the sharp fall in net asset value from £52.6mn to £28.2mn (21.9p).

Since the period end, RBG has raised £3mn through a share placing to provide additional working capital, having seen net debt increase by a fifth to £22.9mn last year. In addition, the board has recently sold off corporate finance boutique Convex Capital to its management team for £2.6mn including £0.6mn of contingent consideration.

What remains is a legal services group that encompasses London’s mid-tier law firms Rosenblatt and Memery Crystal, but one that needs an improvement in the market environment for corporate law and real estate work. The emphasis is on driving organic growth by recruiting and developing new fee earners, rationalising the cost base to boost margins, and recycling cash generation to pay down debt.

Not everyone is convinced as RBG's share price shed 20 per cent of its value post results. Moreover, even if RBG delivers the cash profit of £6mn that house broker Singer Markets expects for the new financial year and £7.2mn in 2025, the group’s enterprise valuation to earnings multiple is still only in line with less accident-prone professional services sub-sector peers. Singer downgrades its recommendation to hold, too. It's time to sell.