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Knights accelerates recruitment

The legal and professional services group is attracting an increasing number of fee earners from top 50 law firms
January 15, 2020

Knights’ (KGH) strategy is to take advantage of the fragmented legal and professional services market outside of London. Growth is typically acquisition-led, with bolt-on additions of independent regional law firms used to build scale. The six months to 31 October reflected a quiet period on the M&A front as the group focused on integrating the four acquisitions made last year. Two purchases were made post period – Emms Gilmore Liberson for £4.7m and ERT Law Limited for £1.8m – providing entry into Birmingham and a platform for growth in the West Midlands.

IC TIP: Buy at 369p

Ramping up its recruitment efforts helped drive organic revenue growth of 12.6 per cent. A net total of 43 new fee earners were added in the first half, almost as many as were recruited in the entire 2019 financial year. Knights highlights the attractiveness of its business model and culture as the reason why recruits are decamping from the top 50 law firms. Unlike the traditional partnership structure, lawyers don't need to undertake the risk of investing capital to receive a share of the profits nor compete internally for clients.

Average fees per fee earner have dipped by 4 per cent since the year end to £126,000 as new recruits take time to achieve the normal run-rate on fee generation. Together with expenditure on new Manchester premises, increased investment in staff drove a 1.3 percentage point contraction in the underlying pre-tax profit margin to 16.4 per cent. The group is guiding to margin improvement in the second half.

Representing a combination of work in progress and debtors, ‘lock-up days’ indicate the amount of time it takes to convert completed work into cash. Knights kept its lock-up days flat at 94 days during the half, well below the industry average of 145 days. Underlying cash conversion dropped from 138 per cent to 77 per cent, which management attributes to an exceptional amount of cash being released from lock-up from acquisitions last year. Net debt (excluding £19.8m in lease liabilities) has risen by over a fifth since the year-end to £17.1m, largely driven by deferred consideration payments for previous acquisitions.

House broker Numis forecasts adjusted pre-tax profit of £14.7m and EPS of 16.1p for the full year, rising to £18.2m and 19.9p in 2021.

KNIGHTS (KGH)    
ORD PRICE:369pMARKET VALUE:£273m  
TOUCH:367-371p12-MONTH HIGH:396pLOW:205p
DIVIDEND YIELD:0.6%PE RATIO:53  
NET ASSET VALUE:58p*NET DEBT:40%**  
Half-year to 31 OctTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p) 
201823.91.451.710.60 
201932.02.792.881.10 
% change+34+93+68+83 
Ex Div:16 Feb    
Payment:16 Mar    
*Includes intangible assets of £46m, or 62.5p a share, **Excludes lease liabilities of £19.8m