Knights Group Holdings PLC (LON: KGH)

Knights Group Holdings Plc is a United Kingdom-based law company. The Company focuses on providing legal and professional services. The Company also provides corporate and commercial legal services at scale and across a broad sector, like the larger national law firms. The Company operates six offices: Newcastle-Under-Lyme, Wilmslow, Chester, Derby, Cheltenham, and Oxford. The Company’s service lines include real estate, litigation, corporate, and private client.

The board intends to resume paying dividends regarding the year ending 30 April 2022 as per the previous dividend policy of paying out 20% of profit after tax.

UK Legal Service Industry

The UK legal service market remained resilient despite pandemic disruptions. At the same time, most firms work under the traditional partnership model, rather than operating as a corporate business with a clear division between management and fee earners. The Covid-19 has been a blessing in disguise to the corporate structure. The managers could act with agility to adapt according to market conditions, leaving lawyers to focus on delivering the business.

The expected value of the overall UK legal services market in 2020-21 is around £36.7 billion. The value of the addressable market in which the Company operates outside London is around £3.1 billion. The size and scale of the regional market opportunity, the agility to respond to changing market drivers, and corporatized model provides Knights with an opportunity to continue to grow its market share.

Growth Prospects

• Organic growth: The Company focuses on broadening its relationship with its existing clients by delivering more than one service. The Company's business model is well-positioned to address a greater share of its clients need, and the Company saw a 10% increase in the number of existing clients using more than one service in FY21.
• Strategic acquisitions to increase market presence: The Company is a leading consolidator in the UK legal services sector through selective, high-quality acquisitions. In FY21, the Company has made three acquisitions and added 194 new fee earners in its portfolio. The Company will continue to execute its strategy to acquire businesses that provide entry into a key market, providing a platform for organic growth in the region, or building scale in its existing locations.
• Scalable business model: The Company's investments in improving operations and technology provide a scalable future growth platform. The Company has also entered three new locations and scaled the business in an existing location.
• Competitive cost base: The increased scale and reputation have resulted in lower competition, reducing the pressure of salary hikes on the management. The operations outside London has resulted in lower property cost which also improves margins of the Company. The Company also has a better Fee Earner to Non-Fee earner ratio compared to the industry average.

Key Risks 

• Professional liability: Any negligence, breach of regulatory duties by the fee earners could lead to third party claims, resulting in financial or reputational losses.
• Regulatory and compliance risk: The legal service industry is heavily regulated not only by government guidelines and regulations but also by Solicitors Regulation Authority (SRA), Information Commissioners Office (ICO) and Financial Conduct Authority (FCA). Any non-compliance may result in reputational or financial implications.
• Retention of personnel: The growth and business of the Company are heavily dependent upon the quality of personnel that works in the organization. There is an intense competition in the marketplace for such personnel. Any difficulties in attracting and retaining such high-quality personnel could impact the Group’s ability to deliver solid financial or operational performance.
• Data security: The Company holds and maintains the personal as well as financial data of its clients. Any data breach or cyber attack would impact not only the day-to-day operations but also affect the clients' trust, which could lead to the reduction of business.
  

Now we will analyze some key fundamental and shareholders statistics of Knights Group Holdings PLC.

Financial and Operational Highlights (for twelve months ending 30 April 2021 as of 16 July 2021)

(Source: LSE Website)

• The KGH reported revenue growth of 39.00% to £103.20 million in FY21, due to strong organic growth of 10.00% in H2 FY21.
• The continued leverage of overheads resulted in a solid H2 FY21 margin of 21.80% against the H2 FY20 margin of 19.80%.
• The rollout of Knight's approach to cash management in recent acquisitions led to a strong cash conversion of 96.00% in FY21.
• The Company made four acquisitions outside London, namely, Keebles and OTB Eveling, which expanded its footprint into Sheffield and the Southwest. In addition, Mundays strengthened Knights' presence in the Southeast.
• The acquisition of Housing Law Services was completed in April 2021, which added a niche housing team to complement Knights' existing housing services offering.
• The Company proactively undertook a cost reduction exercise in the initial period of Covid-19, which reduced staff cost from 61.40% of revenue in FY20 to 60.80% in FY21.

Financial Ratios (H2 FY2021)

Share Price Performance Analysis

(Source: Refinitiv, Research done by Kalkine Group)

On 24 August 2021, at 9:40 AM GMT, KGH’s shares were trading at GBX 401.00, down by 3.14% against the previous day closing price. Stock 52-week High and Low were GBX 500.00 and GBX 355.15, respectively.

On a daily chart, the stock price is sustaining between the middle and lower Bollinger bands. Hence, there could be an uptick in the stock price in the near term.

In the last five years, KGH’s stock has delivered a solid return of ~136.57%. Also, it has outperformed the FTSE AIM All-Share Industrial Goods and Services Price Return Index with a return of about 27.11% and the FTSE AIM All-Share index with a return of about 16.94%. 

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Business Outlook Scenario

KGH delivered an excellent performance in FY21, with revenue growth of 39.00% against FY20. The Company has a lower debt/equity ratio of 0.81x compared to the industry median and a higher current ratio of 1.61x, reflecting financial strength. The Company benefitted from the corporate structure and acquisition strategy as it succeeded to attract employees from the top 50 law firms and now caters to 45 companies of the FTSE 250 Index. The Company's business model of providing multiple services continues to attract new customers and solidify their relationships with the existing customers. In addition, the acquisition strategy and expansion plans beyond London helped the Company expand its market presence and improve margin. The management expects the momentum to continue in FY22 on the back of solid pipeline of senior fee earner candidates along with a strong pipeline of possible acquisition opportunities.

Considering the Company’s market leadership position, high employee retention, solid financials, continued acquisition strategy, and support from the valuation as done using the above method, we have given a “Speculative Buy” recommendation on Knights Group Holdings PLC at the current price of GBX 401.00 (as on 24 August 2021 at 9:40 AM GMT), with lower-double digit upside potential based on 21.12x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached. The recommended target is above the Resistance level 2 and if Knights Group Holdings PLC attains momentum or breach it, then target price as per valuation table could be seen in the near term as per technical chart analysis. 

*All forecasted figures and Peer information have been taken from Refinitiv. 

*The dividend yield is subject to change as per the stock price movement. 

*The reference data in this report has been partly sourced from Refinitiv.

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