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Exploiting valuation anomalies

A professional services group and commodities royalty company are well-placed to trade through the current macro-economic environment, factors not embedded in their ratings
September 13, 2022
  • Legal services first-half revenue increases 74 per cent to £22.3mn
  • Pre-tax profit up 10 per cent to £4.4mn
  • EPS of 3.6p and interim dividend of 2p a share

Half-year results from RBG (RBGP:87p), a professional services group that encompasses one of London’s mid-tier law firms (Rosenblatt and Memery Crystal), litigation funding arm LionFish and corporate finance boutique Convex Capital, highlight a glaring valuation anomaly with peers.

Despite the directors reiterating guidance in line with Singer Markets’ expectations of 21 per cent growth in annual pre-tax profit and earnings per share (EPS) to £12.9mn and 10.8p, respectively, the shares trade on a forward price/earnings (PE) ratio of 8, a 45 per cent discount to sector peers. Moreover, analysts expect a full-year payout per share of 5.9p, which underpins a 6.8 per cent prospective dividend yield. Having delivered free cash flow (FCF) of £3.1mn (3.2p a share) in the first half, analysts expect RBG to report FCF of £8.3mn in the second half to help pay down net debt of £17.3mn.

The current macroeconomic environment is positive for several of RBG’s business activities. For instance, Convex completed five deals that generated revenue of £4.2mn in the first half, and is working on 24 active deals of which three are nearing completion. Merger & acquisition (M&A) activity is set to remain strong as owners of small- and medium-sized enterprises look to crystalise their wealth by selling out to larger corporates or private equity.

In the six-month period, LionFish booked £1.7mn gains on litigation assets and made £2.5mn in participation rights sales. LionFish is currently invested in 11 cases, having deployed half its £11.3mn total capital commitment, and expects to generate the majority of its gains from potential settlements this year.

The enhanced scale of RBG’s legal services division is another positive. Last year’s acquisition of Memory Capital has diversified the business into non-contentious areas of law and improved its ability to win mandates across dispute resolution, corporate transactions (44 per cent of divisional revenue) and financial restructuring.

RBG’s share price is unchanged since my last update (Lock into a bumper free cash flow yield’, IC, 18 July 2022), albeit the shares have produced a 40 per cent total return since I initiated coverage (Alpha Research: ‘Back a winning legal team’, 2 June 2020). The valuation anomaly is worth exploiting. Buy.

 

Trident Resources offers near-term share price catalysts

Interim results from Trident Royalties (TRR:50p) highlight the substantial progress the commodity royalty group has made in the past 12 months. Having completed $76mn of acquisitions, total royalty revenue and net offtake receipts increased ninefold to $7.8mn in the first half.

The direction of travel is undeniably positive. For instance, Trident holds a valuable royalty over the Thacker Pass lithium open mine project in Nevada, one of the largest known lithium deposits in North America. Lithium Americas plans to commence early works production and release a defined feasibility study later this year, targeting annual output of 40,000 tonnes of lithium carbonate (Phase 1), a major catalyst to transform Trident’s revenue profile. Analysts at Tamesis Partners value the royalty at $151mn (44p), accounting for half their unrisked net asset value (NAV) estimate of $298mn (87p).

Trident also has the right to purchase a 50 per cent share in the royalty over the Sonora Lithium Project, an advanced development-stage asset in Mexico, to further boost its exposure to battery metals and capitalise on the strong pricing environment and structural end-market growth drivers.

Trident’s share price has risen 35 per cent in a falling market since I initiated coverage (Alpha Research: 'A lowly rated commodity and green energy inflation hedge’, 1 November 2021), and is up ahead modestly since my last update (‘Profit from high commodity prices and inflation’, IC, 9 May 2022). Rated 43 per cent below analysts’ unrisked NAV estimates, the shares remain a buy.

 

Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.

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