Knights Group Holdings back to organic growth

Regional legal firm consolidator Knights Group Holdings (LON: KGH) returned to organic growth in the first half. AIM-quoted Knights has broadened its regional covered and increased its scale.

In the six months to October 2023, revenues rose from £71.2m to £75.3m, while organic growth was 3.3%. Underlying pre-tax profit improved from £9m to £11.6m. The interim dividend is 5% higher at 1.61p/share.

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Higher charges have helped revenues to grow, although they are still well below London rates. A further rise will be put in place, including for more recent acquisitions, this May. Staff retention is improving, and 20 new senior fee earners have been hired this year.

The Knights share price has recovered slightly over the past year but, at 120p, the shares are trading on less than six times prospective earnings. The forecast yield is 3.6%.

The problem for investors appears to be the high borrowings. The first half is weaker in terms of cash generation, and it will improve in the second half. After £7.5m of acquisition spending net debt was £38.3m, although it I expected to be around £30m at the end of April 2024.

Management suggests that it is unlikely that there will be any more acquisitions in the short-term, but there will be more acquisitions further into the future. The borrowing facility is £70m and lasts until November 2026. That provides funds for further acquisitions when they are secured.

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Interest should be covered around six times by operating profit this year. As interest rates appear to have peaked this look a comfortable level and it should be higher in the next couple of years, but that depends on acquisition activity.

The Knights share price is too low. It may take time, but it will eventually better reflect the progress of the business.

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