Hits: 10

5 March 2020

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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

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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

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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

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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

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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.