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 383.85

• Archers’ Acquisition: The recent acquisition of Langleys Solicitors LLP shall expand the Company’s presence in the East of England. Also, the acquisition of Archers Law LLP is expected to be immediately earnings enhancing, as the Board anticipates that acquisition would contribute a profit before tax margin of around 30%.
• Strong Platform: KGH has an excellent business model with a substantial client base. Moreover, it has conducted significant acquisitions to supplement organic growth and the trading remained strong in FY22 thus far.
• Undervalued Multiples: On a forward 12-month basis – EV/Sales EV/EBITDA, and Price/Book valuation multiples are undervalued than the median of the Industrials sector.
• Technical Indicator: From a technical standpoint, 14-day RSI (~38.71) is in the oversold zone, while the current market price is trading around the middle Bollinger band.

Key Risks

• Margin Pressure: The cost inflation can offset the expected margin accretion from Archers’ acquisition.
• Macroeconomic and Business Risk: KGH is exposed to uncertainties related to supply chain snags, subdued factory activity, and the expected tightening of monetary policy.
  

Trading Update (for the six months ended 31 October 2021, as of 23 November 2021)

• Business Resilience: In H1 FY22, KGH demonstrated a 29% and 13% year-on-year growth in revenue and underlying PBT margin, respectively.
• Financial Position: The cash conversion remained excellent, and it reported a net debt of £23.1 million at the end of H1 FY22.
• Acquisition Completions: It had integrated the acquisitions of Keebles and Mundays, which shall bolster the footprints in the Yorkshire and southeast regions.

One Year Share Price Chart

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

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

 Conclusion 

Recently, KGH agreed on a new extended revolving credit facility for total committed funding of £60 million until October 2024, with HSBC UK, Allied Irish Bank, and Lloyds Bank. It will support the Company’s efforts to scale business across the UK organically and through acquisitions. Moreover, the expansion plans and acquisition strategy will help the Company in expanding its market presence and improve margins. The stock made a 52-week High and Low of GBX 472.00 and GBX 368.30, respectively. 

Based on the recent acquisition, financing, positive trading momentum, promising market dynamics, 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 current market price of GBX 383.85 (as of 2 February 2022, at 10:45 AM GMT), with a lower double-digit upside potential based 20.21x Price/Earnings (approx.) on FY22E Earnings Per Share (approx.).

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. 

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.

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.

Kalkine Media Limited, an affiliate of Kalkine Limited, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.