Keystone Law Group PLC

Keystone Law Group PLC (KEYS) is a London-headquartered legal company that is focused on offering legal services for business and individuals using technology and modern working practices to drive productivity and deliver results. The company provides service in various sectors such as Financial Services, Marine & Shipping, Life Sciences & Healthcare, High-Net Worth Family Office, Hotels, Hospitality & Leisure, Technology & Telecoms, and many more. The group boasts thousands of clients, who are served with the help of over 300 lawyers and 40 support staff.

Financial Highlights (H1 2020, in £m)
The company has continued to focus on delivering the UK centric organic growth strategy, which helped it to report results above expectations during the period, as revenue for the first six months increased by 15.3% to £23.0 million (H1 2019: £19.9 million). Gross profit rose from £5.38 million in H1 2019 to £6.18 million. Representing the marketing efforts of the group, administrative expenses increased to £2.96 million in the first half of 2019 to £3.5 million during the current period, while operating income rose to £2.36 million from £2.12 million in H1 2019. Adjusted profit before tax rose by 15.4% to £2.7 million (H1 2019: £2.3 million) and statutory profit before tax was higher at £2.36 million against £2.12 million in H1 2019. Profit during the period rose to £1.97 million from £1.71 million in the second half of 2019, which corresponded to basic earnings per share rising to 6.3 pence (H1 2019: 5.5 pence). With operating cash flow of £2.4 million (H1 2019: £2.2 million), cash conversion was 90.3% (H1 2019: 94.6), and cash and cash equivalents rose to £6.35 million from £5.31m in H1 2019. Along with a special dividend of 8.0 pence per share, the group declared an interim ordinary dividend of 3.2 pence per share (H1 2019: 2.5 pence per share), reflecting the strong performance by the group in the first half.

Share Price Commentary

Daily Chart as at 23-September-19, before the market closed (Source: Thomson Reuters)

On 23 September 2019, at the time of writing the report (at 11:15 am GMT, before the market closed), KEYS stock was trading at GBX 490, down by 6.67 per cent against the previous day closing price. Stock's 52 weeks High and Low is GBX 550.00/GBX 300.00. The company’s stock beta was 2.03, reflecting considerably more volatility as compared to the benchmark index. The outstanding market capitalisation was around £164.81 million, with a dividend yield of 1.71 per cent.

Conclusion
While the group reported better than expected results, the valuation of the company looks highly overvalued in comparison to its peers. Its forward price/equity ratio stood at 33.9x against the industry median of 13.3x. Similarly, price/cash flow was 38.4x versus the industry median of 13.9x. Moreover, the group faces the risk of reduced revenues, margins and the ability to recruit new lawyers if the group experiences any loss of market share due to competitor firms, or a newly established firm. The lawyers of the company are self-employed, who contract with the company mainly via personal service companies, and the risk that the company would have to list these lawyers as permanent workers have reduced, which could result in additional costs.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 525 (as on 20 September 2019), while we look for any upcoming catalysts in the near term.

Destiny Pharma PLC

Destiny Pharma PLC (DEST) is a Brighton, United Kingdom-headquartered clinical stage, a biotechnology company which is seeking to build a portfolio of novel antimicrobial drug products that can access markets close to traditional antibiotics, representing a new approach to the treatment of infectious disease by antibiotic resistant bacteria. Leaving the bacteria unable to mount a resistance response, the proprietary XF Drug Series act via an ultra-rapid action which kills bacteria, helping to access markets closed to traditional antibiotics due to the threat of antimicrobial resistance.

Recent Development
The company on 10 September 2019 announced it had been jointly awarded a grant by the National Biofilms Innovation Centre (NBIC) to investigate antimicrobial candidates from the XF drug platform against microbial infections of the eye, in collaboration with the University of Sheffield.

Financial Highlights (H1 2019, in £m)

Source: Company Filings

As the group is still in the development phase, no revenue was reported during the period. The lead asset of the firm is XF-73 and its nasal gel Phase 2b trial has started enrolling 200 surgical patients across sites in the US and Europe, while Prototype XF-73 nasal gel pack for the final marketed product was being developed to deliver an easy-to-use, single dose, nasal gel tube. While the administrative expenses rose to £2.55 million from £2.03 million in H1 2018, operating loss declined slightly from £2.62 million in H1 FY18 to £2.46 million in H1 FY19. Similarly, loss before tax decreased to £2.42 million from £2.58 million in H1 2018. Total comprehensive loss from continuing operations declined to £2.1 million against £2.27 million recorded in H1 2018, which corresponded to a loss per share of 4.8 pence, against a loss per share of 5.2 pence in H1 2018. Reflecting the increased investment in clinical programmes, expenditure on research and development in the period was £1.7 million (H1 2018: £1.3 million) and cash position remained strong with cash and term deposits at 30 June 2019 of £9.1 million (30 June 2018: £15.1 million).

Share Price Commentary

Daily Chart as at 23-September-19, before the market closed (Source: Thomson Reuters)

On 23 September 2019, at the time of writing the report (at 9:25 am GMT, before the market closed), DEST stock was trading at GBX 40.50 and remained flat against the previous day closing price. Stock's 52 weeks High and Low is GBX 90.50/GBX 33.00. The company’s stock beta was 2.86, reflecting considerably more volatility as compared to the benchmark index. The outstanding market capitalisation was around £17.83 million.

Conclusion
While the company is making progress in its portfolio of drugs, it is still in the clinical phase and is prone to inherent risks in drug development. These include programmes being delayed or abandoned, or a requirement to run additional clinical trials, as clinical studies may not give the expected results, which can lead to additional and unexpected cost. The group is funded through to 2021, but the successful commercialisation of potential drugs can be under risk if it does not generate market acceptance from the purchasers and decision makers.

Based on the headwinds faced by the group, we have given a "WATCH" recommendation at the closing price of GBX 40.50 (as on 20 September 2019), while we look for any upcoming catalysts in the near term.

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