- Flat organic sales
- Interest rate hikes affecting workload
Shares in Knights (KGH) have lost almost a third of their value since the start of the year. Today’s results have done something to restore confidence in the legal services group, however. Revenue rose by 13 per cent to £142mn in the year to 30 April 2023, while adjusted profit before tax increased by 19 per cent to £21.6mn.
Adjusted profits are all well and good, but Knights is famously acquisitive, and there is often a big discrepancy between its headline and statutory figures. In its 2022 financial year, for example, “one-off” acquisition costs amounted to £13.3mn. The 12 months to 30 April 2023 proved more reassuring: non-underlying costs were just £6.6mn and statutory profit before tax came in at a respectable £11.5mn.
There are still causes for concern, though. Organic sales remained flat in its 2023 financial year, which management blamed on “sharp rises in interest rates”, which in turn caused transactional and debt-reliant work such as residential property, M&A and volume remortgaging to slow down.
This explanation is convincing, but there has long been a question over Knights’ growth strategy. Back in January, analysts at Liberum warned that the lack of organic sales growth flew in the face of a 7-8 per cent increase in fees, and suggested “clients are leaving with the lawyers that have departed, or that fee rate increases are not being accepted by clients”.
The group reported a “solid” start to the current year, and predicted an imminent return to organic growth. However, as the cost of borrowing continues to rise, we think that Knights’ strategy of hoovering up regional law firms – while generating questionable returns with its existing portfolio – will come under pressure. Hold.
Last IC View: Hold, 122p, 16 Jan 2023
KNIGHTS (KGH) | ||||
ORD PRICE: | 71p | MARKET VALUE: | £61mn | |
TOUCH: | 69-72p | 12-MONTH HIGH: | 142p | LOW: 60p |
DIVIDEND YIELD: | 5.7% | PE RATIO: | 8 | |
NET ASSET VALUE: | 108p* | NET DEBT: | 80% |
Year to 30 Apr | Turnover (£bn) | Pre-tax profit (£mn) | Earnings per share (p) | Dividend per share (p) |
2019 | 52.7 | 5.20 | 5.84 | 1.90 |
2020 | 74.3 | 4.06 | 2.44 | 1.10 |
2021 | 103 | 5.51 | 4.14 | nil |
2022 | 126 | 1.06 | -3.02 | 3.50 |
2023 | 142 | 11.5 | 9.28 | 4.03 |
% change | +13 | +985 | - | +15 |
Ex-div: | 31 Aug | |||
Payment: | 29 Sep | |||
*Includes intangible assets of £88mn, or 103p a share |