Knights Group Holdings PLC

Knights Group Holdings PLC (LON: KGH) is an FTSE AIM 100 index listed entity that provides legal and professional services.

Investment Rationale – SPECULATIVE BUY at GBX 351.00

• Organic and Acquisitive Growth: KGH has a strong business model and a large customer base. Furthermore, it has made significant acquisitions to support organic growth, and trading has remained solid thus far in FY22. Moreover, the Company's footprint in the East of England will be bolstered by the recent acquisition of Langleys Solicitors LLP. In addition, the acquisition of Archers Law LLP is projected to boost earnings immediately.
• Improved GDP: Britain’s economy surged more than anticipated with 0.8% month-on-month growth in January 2022.
• Growth Prospects: KGH’s increased scale, expanded footprints, successful integration of Keebles and Mundays, and growing pipeline holds significant growth opportunities for the Company.
• Financial Growth: During H1 FY22, there was a significant top-line and bottom-line growth, while the cash conversion remained excellent.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales and Price/Book valuation multiples are undervalued than the average of the Industrials sector.
• Technical Indicator: From a technical standpoint, 14-day RSI (~42.65) is in the oversold zone, while the current market price is trading below the middle Bollinger band.

Key Risks  

• Macroeconomic Uncertainties: US Consumer Price Inflation surged 7.9% year-on-year in February 2022, which can prompt further expectations of greater tightening from the Federal Reserve this year.
• Ukraine Tension: The mounting concern over the Russian invasion in Ukraine, and subsequent sanctions from the West can continue to weigh on the equity market.

Half Yearly Results (for the six months ended 31 October 2021, as of 11 January 2022)

(Source: Company Website)

• Increase in Top Line: The Company posted revenue of £59.73 million in H1 FY22 compared to £46.24 million in H1 FY21, resulting in an increase of 29.17%.
• Turning into Profits: It also posted operating profits of £1.90 million in H1 FY22 as against the loss of £0.25 million in H1 FY21.
• Financial Position: The cash conversion remained excellent, and it reported a net debt of £23.1 million at the end of H1 FY22.

One Year Share Price Chart

 (Data Source: REFINITIV, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

* Peers: Tribal Group PLC, Equals Group PLC, and Allegion PLC.

* All the peers are selected from the industrial sector as classified on the LSE Website. 

Conclusion 

Based on the recent business update, increase in top-line growth, turning to profits, inflation scenario, with support from the valuation as done using the above method, we have given a “SPECULATIVE BUY” recommendation on Knights Group Holdings PLC at the closing market price of GBX 351.00 (as of 11 March 2022), with a lower double-digit upside potential based 18.48x Price/Earnings (approx.) on FY22E Earnings Per Share.

Nevertheless, markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Note 3: Dividend Yield may vary as per the stock price movement.

Note 4: Target Price refers to a price level which the stock is expected to reach as per the relative valuation method and or technical analysis taking into consideration both short-term and long-term scenarios.

Note 5: ‘Kalkine reports are prepared based on the stock prices captured either from the London Stock Exchange (LSE) and or REFINITIV. Typically, both sources (LSE and or REFINITIV) may reflect stock prices with a delay which could be a lag of 15-20 minutes. There can be no assurance that future results or events will be consistent with the information provided in the report. The information is subject to change without any prior notice.’ 

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavorable movement in the stock prices.

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