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The business has come a long way since it listed in 2019
Thursday 13 Jan 2022 Author: Ian Conway

Legal services group DWF (DWF), the only Main Market legal firm, is ‘massively undervalued’ according to its chief executive Nigel Knowles.

In our view this is not just a case of a boss talking up his own business, there’s real merit to this view and investors should take advantage.

By slimming down operations during the pandemic and creating three separate but highly complementary units, the firm has seen a ‘compelling step change in profitability’ as witnessed by the 40% jump in pre-tax earnings for the first half of the current financial year.

The group now operates through three divisions of Legal Advisory, Connected Services and Mindcrest.

The Legal Advisory business handles everything from conveyancing and property services to advising on mergers and acquisitions, debt and equity financing, dispute resolution, insurance and tax matters.

The surge in M&A and corporate fund raising since the start of the pandemic has meant boom times for law firms while the insurance business has bounced back due to Covid-related policy claims and even the property business has performed better than expected.

The unit’s gross margin in the first half was 52.5% thanks in part to a significant reduction in payment days, and all areas of Legal Advisory are reporting strong pipelines for the rest of the year.

Connected Services includes areas like forensic accounting and auditing, claims management, regulatory consulting, compliance and training. Gross margins were 44% in the first half as the firm took on new businesses and more work, incurring start-up costs, but as these contracts mature so the returns will increase.

Mindcrest provides outsourced compliance, legal analytics and litigation services, and gets some of its work from legal services. Gross margins were 46.5% in the first half, but the chief executive believes the actual underlying margin is more like 60%.

One of the keys to DWF’s success in the last year has been the cross-selling of services, with the number of clients paying more than one division for advice and paying for it more than one country, and the percentage of fees generated from these clients both growing steadily.

The firm is growing geographically but selectively and has recently set up an office in Saudi Arabia to tap into the huge Middle Eastern legal market.

Finally, the firm’s ESG strategy, which includes climate and diversity targets, is designed to fit the bigger clients it expects to take on and gives it a ‘competitive advantage’ according to Knowles.

What is clear is that on just 11 times current year earnings for double-digit compound earnings growth out to 2024 according to analysts’ forecasts, there is scope for major upside in the shares.

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