Knights reports 68% increase in statutory profits

Shares in legal services group Knights (KGH) reached an annual high in the wake of its interim results, which revealed a 68 per cent jump in statutory pre-tax profits to £6.9mn. 

Profitability was fuelled by revenue growth of 6 per cent – roughly half of which was organic – better staff retention and margin improvements. The latter benefited from an increase in the net interest earned on client money. “Non-underlying costs” also decreased by 8 per cent to £2.9mn, which helped the statutory numbers. 

This last point is particularly important, as Knights has historically reported a long list of one-off costs relating to acquisitions and reshuffles. As a result, there have been some very large discrepancies between its statutory figures and its “underlying” profitability, and a question mark over how “one-off” the costs actually are. Contingent consideration, for example, is classed as a non-underlying operating cost despite the fact that Knights’ growth strategy is predicated on M&A. 

This issue has not been fully resolved. Knights’ underlying profit before tax is still £4.7mn higher than the statutory number. Meanwhile, it generated slightly less net cash from operating activities than it did this time last year. Nevertheless, the sizeable jump in statutory profits is reassuring.

Management said trading was still in line with expectations and emphasised the importance of organic growth – something that has languished in recent years amid the constant M&A. We’re still cautious on the demand outlook as Knights is exposed to residential property and corporate work, and would like to see more evidence of organic growth and lower one-off costs. Things do seem to be improving, however. Hold. 

Last IC view: Hold, 71p, 10 Jul 2023