- Disposal of litigation funding arm LionFish
- Net debt forecasts lowered
- Share price bounces 13 per cent
- 2023 PE ratio of 3.8 and dividend yield of 14.8 per cent
- Sector now attracting private equity interest
RBG (RBGP:30.5p), a professional services group that encompasses London’s mid-tier law firms Rosenblatt and Memery Crystal and corporate finance boutique Convex Capital, has completed the disposal of its litigation funding arm, LionFish.
The divestment reduces RBG’s exposure to third-party litigation funding commitments and not a minute too soon after the subsidiary lost two court cases, missed profit guidance that led to January’s profit warning and resulted in a £4mn non-cash impairment change in the 2022 accounts.
Blackmead Infrastructure, a dedicated fund management business run by Foresight Group, is acquiring four of the eight live investments within LionFish for up to £3.07mn. The cash consideration comprises an initial payment of £1mn and an additional £2mn payment, subject to successful outcomes of the cases.
Importantly, RBG will be discharged from £2.6mn of ongoing funding commitments in relation to the disposed assets but will retain its other four live investments, all of which are fully funded. The four cases have a balance sheet value of £2.23mn, so offer potential for RBG to make good the £0.98mn loss booked on the disposal. It also draws a line under RBG’s unsuccessful foray into third-party litigation funding and means that investors can now focus on prospects for its two other business units, both of which are being significantly undervalued.
Low earnings multiple and high dividend yield
House broker Singer Capital Markets is maintaining forecasts that point towards RBG delivering current-year pre-tax profit of £10.2mn on slightly higher revenue of £52mn. On this basis, expect earnings per share (EPS) of 8p and a dividend per share of 4.5p, implying the shares are rated on a prospective price/earnings (PE) ratio of 3.8 and offer a 14.8 per cent forward dividend yield.
Furthermore, factoring in the proceeds from the LionFish disposal and estimated free cash flow of £4.8mn (5p per share), analysts expect net debt (excluding IFRS16 lease liabilities) to be reduced from £19.2mn to £15.5mn by the year-end. RBG’s indebtedness has been a concern in some quarters, so a sizeable debt reduction should be viewed in a positive light and is supportive of the board’s ability to pay the 4.5p per share forecast dividend. Based on Singer’s forecasts, RBG’s enterprise valuation equates to a miserly three times cash profit estimates of £14.9mn.
To put RBG’s valuation into perspective, DWF Group (DWF), the UK’s largest law firm, announced last week that it is in bid talks with Inflexion Private Equity Partners. The indicative offer price values DWF on 4.5 times 2023 cash profit estimates to enterprise valuation and a forward PE ratio of 9.6. RBG is priced on 32 per cent and 59 per cent ratings discounts, respectively.
Boardroom upheaval
Admittedly, investor sentiment towards RBG has not been helped by recent news that newly appointed finance director Suzanne Drakeford-Lewis has taken a six-month sabbatical for personal reasons. She has been replaced on an interim basis by Kevin McNair who has spent the past 18 years as finance director of various publicly quoted and privately-owned businesses. Drakeford-Lewis is expected to resume her duties in January 2024.
Also, RBG is engaged in a High Court battle with former chief executive Nicola Foulston who claims she was wrongfully dismissed when the board terminated her contract at the start of the year. As reported in the Law Gazette, RBG denies all allegations against it and filed a counterclaim last month for loss and damage caused by alleged breaches of contract by Foulston. The former boss still retains a 9.44 per cent shareholding in RBG. It’s certainly a side show that shareholders could do without, but it’s only reasonable to assume that RBG’s board will have thought it had a sound legal basis to act as it did in the first place.
Bargain basement valuation
In any case, it’s more than priced into the current rating with RBG’s shares rated on a 53 per cent discount to net asset value (NAV) of 64.4p, and trading on a previously mentioned forward PE ratio of just 3.8. A hefty projected free cash flow yield of 16.5 per cent could even spark interest from predators now that LionFish has been sold.
So, although RBG’s share price has come under pressure since I covered the 2022 annual results, I firmly believe there is strong recovery potential here. Buy.
■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com. The books are priced at £16.95 each plus postage and packaging (P&P) of £3.95 [UK], or both books can be purchased for the promotional price of £25 plus P&P of £5.75.
