Hits: 18

22 July 2020

Knights Group -FY Results

Share Price 425p

Mkt Cap £348m

Conflict Disclosure: No Holding 

  • Results Revenue up 41% to £74.3m said to include 10% organic growth. PBT up 45% to £13.6m, representing an 18% margin. EPS up 27% to 14.3p. No final dividend. Net debt £15.9m. Covid represents an opportunity for recruitment and acquisition and the company is confident of emerging stronger.  Fees per fee earner reduced from 131k to £119k,
  • Estimates Results are ahead of expectations at the revenue level but in line at the PBT level. On the back of a £20m placing and 2 Acquisitions in March forecasts anticipate 27% revenue growth to £92.2m and 33% PBT growth to £18.4m. 
  • Valuation PE 22X. Gateley trades at 10.6X and DWF Group 5.8X.
  • Conclusion Keystone and Knights are emerging as the two most resilient firms who are using stock markets effectively to grow their business. Both are very expensive and look set to stay expensive.

5 March 2020

A picture containing clipart, music

Description automatically generated

Knights Group – Acquisitions and Placing 

Share Price 455p

Mkt Cap £341m

Conflict Disclosure: No Holding

  • Acquisitions 219 fee earners are being acquired in Leeds, Crawley and Maidstone, for up to £28.6m, and the company is placing £20m of new equity at 420p/share. The Leeds business is being acquired at 1.1X revenue while it makes 12% operating margins, which are expected to be 20% post integration. The Crawley and Maidstone business is being acquired at up to 0.7X revenue which has made a 4% operating margin. This is expected to be 15% PBT margin. Current trading leaves management confident of achieving full year numbers.
  • Estimates The acquisitions add £30m pro forma revenue and £5.4m of post integration pro forma profit which is a little below 10% of next year’s PBT expectation. £20m of new shares adds c 6% to the equity base so ultimately the difference of 4% may be the earnings enhancement.
  • Valuation On March 2021 current expectation at the 420p placing price the shares trade at 20.6X with a 1% yield. 3.8X revenue
  • Culture The CEO holds 44% of the stock which provides some comfort for shreholders.
  • Conclusion This looks to be a good acquisition which will leave the company less geared. But the shares are expensive for a regional law firm.

15 January 2020

A picture containing clipart

Description automatically generated

Knights Group Holdings – H1 Results 

Share Price 369p

Mkt Cap £273m

Conflict Disclosure: No Holding

  • Results Revenue up 34% to £32m. PBT up 20% to £5.3m and EPS up 9% to 5.95p at underlying level. Net debt £17.1m at 30 October.  43 fee earners recruited in H1 taking the total to 290 at October. 2 acquisitions were made in H1 in Birmingham with 52 fee earners. Outlook refers to a strong start to H2, confidence in meeting expectations for full year and a further 31 accepted new positions to start in H2.
  • Estimates PBT of £13.9m is expected for full year to April 20 which will need a strong H2. That’s based on £72m revenues requiring £40m in H2, a 25% uplift on H1.
  • Culture 15 Reviews on Glassdoor provide an average score of 3.4/5. Comments from former staff range from “No politics” to “corrupt”.
  • Valuation PER 31X Yield 0.9%
  • Conclusion The risks of net debt increasing are highlighted by Ince Group’s fund raise today. On 31X the shares are too high.

6 January 2020

Knight Group – Acquisition 

Share Price 339p

Mkt Cap £176m

Conflict Disclosure: No Holding

  • Acquisition A Birmingham based commercial litigation firm ERT with 24 fee earners is acquired for £1.8m, 50% in cash and 50% shares, subject to clawback for 2 years. That is a revenue multiple just under 1X and 6X PBT which is expected to fall to 5X post cost synergies.
  • Estimates In the context of £17.2m PBT for the year to April 2021 this adds c.2% but is not material at the EPS level. H1 results are expected on 15 January. 24% PBT growth is expected to April 2021. Net debt at April 2019 was £14.1m
  • Valuation The shares have performed strongly (up 88% over 12 months) and now trade at 20 times April 20 PER with a yield of 1%.
  • Conclusion Well run high quality but the high ROE is a function of acquiring regional firms on low multiples.  I don’t see this as a “forever” stock but it could continue to well for a year or two.

21 November 2019

A picture containing clipart

Description automatically generated

Knights Group – Trading Update

Share Price 331p

Mkt Cap £244m

Conflict Disclosure: No Holding

  • Update H1 trading is reported to be “strong” which is in line with expectations. 43 new fee earners recruited in H1. New larger Manchester offices too.
  • Estimates FY PBT is expected to be £40.6m, EPS 10.7p
  • Valuation PER 20X yield 1%
  • Conclusion Knights is a strong model but 20X is a full valuation for a people business.

9 July 2019

A picture containing clipart

Description automatically generated

Knights Group – FY Results  

Share Price 268p

Mkt Cap £196m

Conflict Disclosure: No holding

  • News First post IPO results show revenue up 51% to £52.7m and EBITDA also up 51% to £11.3m. PBT £9.8m and EPS up 55% to 11.88p. Net debt £14.1m. Average fee per earner up 22% to £131k. Outlook refers to a good start to year and confident of delivering continued growth. The company completed 4 acquisitions in the year and has a “healthy” pipeline.
  • Estimates The 21 May trading update said Adj. PBT expected to be slightly ahead of market expectations.
  • Valuation PER 16.5X yield 1.2%. ROCE is c 15%.
  • Conclusion With an enormous arbitrage between private company acquisition prices and quoted valuations I suspect there are a good few years of strong share price performance to be enjoyed by shareholders until valuations become high at which point greed usually spoils it. That’s a long way away yet.

21 May 2019

A picture containing clipart

Description automatically generated

Knights Group – Pre Close Update 

Share Price 283p

Mkt Cap £207m

Disclosure : No holding

  • Update Revenue ahead of expectations at £52.4m (2018 A £34.8m). Within the growth of this acquisitive business organic growth is reported to be 15%.  PBT £9.7m (2018 £4.8m) and net debt below expectations at £14.1m.  The 4 acquisitions made during the year are trading well
  • Estimates The beat is a modest one. Going forwards 36% revenue growth is expected which translates to 75% EPS growth from a 19% operating margin
  • Valuation PER 17.4X yield 0.2%. EV/Sales 4.2X
  • Conclusion The company made its 4 acquisitions at 1.2X – 2X revenue. With such a large arbitrage between public valuations (4.2X revenue) and private ones the acquisition opportunity is substantial.  At this early stage of the quoted legal market development this is a sector not to be avoided. At some stage that arbitrage window will close. That will be the time to sell.