Regional legal firm consolidator Knights (LON: KGH) has continued its acquisition strategy despite the problems due to Covid-19 and management believes that more regional firms may prefer the security of being part of a larger group.
The first half was tough due to the original lockdown, but trading has been better since then and the second half should show double digit growth in revenues and significant progress in profit. Salaries were reduced in the first half, but they have returned to normal levels.
In the six months to October 2020, revenues were 45% ahead at £46.2m, although £19.1m of the increase was from acquisitions. That means that like-for-like revenues were lower, but the fact that there were limited revenues in the early weeks of the period held back the six-month result. Underlying pre-tax profit improved from £5.3m to £6m, but earnings per share were flat at 5.93p.
There was no interim dividend, but there is a good chance that a final dividend will be declared.
Growth does not just come from acquisitions. There were 18 new fee earners recruited in the first six months. They generally come from large firms.
Net debt was £14.4m at the end of October 2020, but there is a credit facility of £40m so there is plenty of cash to help finance further acquisitions.
There were six acquisitions in the previous financial year and the integration is going well – possibly helped by remote working. There were no acquisitions in the first half.
Knights has a good acquisition record, and it has the finance to buy more regional practices. The share price has fallen from its high, although it is still a reasonably high price so it should not hamper the issue of shares as part of the acquisition funding.
A recovery following the figures has pushed the share price back up to 410p. That is 22 times prospective earnings based on a full year profit forecast of £19m.
Knights is highly rated, although this appears warranted given the potential for growth.