- Margins improve, as company gets paid faster and cuts costs
- Net debt grows as Covid-19-deferred VAT payments come back
Legal business DWF (DWF) is in the midst of streamlining its operations. Restructuring of offices in Australia and closures in Belgium and Singapore, coupled with “strict control” of overhead expenditures, has contributed to a 1.7 percentage point improvement in the gross margin. However, this is yet to filter through into its cash flow.
Legal advisory revenue grew 3 per cent, while 'connected services' and Mindcrest, a "managed services" division, grew 14 per cent and 9 per cent, respectively. Connected services, which is an insurance claims handling service, has benefited from Covid-19 related business interruption claims. As Covid restrictions have eased, there has been a pick-up in property damage and casualty claims.
Despite the improved margin and 8 per cent reduction in lock-up days, meaning DWF is getting paid for work faster, there has been a drop in free cash flow from £19.5m to £4.2m. This is because of £5.4m of deferred Covid VAT payments this year following £10.4m of deferrals in the prvious period. When combined with the cost of restructuring in Australia and payments associated with acquisitions, this has pushed net debt excluding lease liabilities up 32 per cent to £77.2m. However, management expects this to fall to between £65m and £70m for the full year.
Compared with its peers DWF looks cheap with a forward price-to-earnings ratio of just 11.6 times. Part of the reason for this could be its relatively large debt pile, although it has been falling compared to growing operating profit.
The issue with traditional law firms is that it is difficult to grow margins because if you have more work you need more people. Connected services and Mindcrest are technology-driven units which means they should benefit from economies of scale. Together they currently only contribute 15 per cent of revenue but if they can keep growing then there will be a re-rating in the share price. However, we are yet to see significant growth yet from quite low bases. Hold.
Last IC View: Hold, 67p, 10 Dec 2020
| DWF (DWF) | ||||
| ORD PRICE: | 110p | MARKET VALUE: | £357.2m | |
| TOUCH: | 109-110p | 12-MONTH HIGH: | 119p | LOW: 74p |
| DIVIDEND YIELD: | 2.7% | PE RATIO: | na | |
| NET ASSET VALUE: | 13.3p* | NET DEBT: | £156m | |
| Half-year to 31 Oct | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
| 2020 | 196.0 | -11.0 | -4.00 | 1.50 |
| 2021 | 203.5 | 11.0 | 3.10 | 1.50 |
| % change | +4 | - | - | |
| Ex-div: | 3 Feb | |||
| Payment: | 4 Mar | |||
| *Includes intangible assets of £50.6m, or 117p a share | ||||
