Berenberg initiates coverage on DWF Group at 'buy'

Analysts at Berenberg initiated coverage on legal and professional services firm DWF Group at 'buy' on Friday, stating the company was "undervalued and largely misunderstood" by public markets.

Berenberg, which started the stock with a 160.0p target price, said DWF has "a clear organic and inorganic growth strategy", and an understandable route to improve margins in line with those of its peers.

"It is a highly defensive investment – this is a sector that has delivered through-cycle performance (the legal services industry's revenues were flat from 2008 to 2010) and a business where two-thirds of revenues comes from acyclical end-markets (largely insurance and real estate)," said Berenberg.

Despite this, Berenberg noted that DWF trades on a single-digit price-to-earnings multiple, offering a 7.1% dividend yield and a 7.8% free cash flow yield on conservative forecasts, with "potential for outperformance".

"This combination of growth and income offers a highly attractive opportunity and material returns for new shareholders from here," said Berenberg.

"DWF's end-markets are highly fragmented and the group has proven form as a consolidator. We expect FCF of £25.0m to £27.0m in FY22, FY23, and FY24, which will de-lever the balance sheet to comfortably under 1x net debt/EBITDA. Our assessment of end-markets and scenario analysis if DWF acquires 5-15% of FY22E's group EBITDA show EPS upside of up to 20% above our organic forecasts, while remaining within management’s targeted leverage range."

Reporting by Iain Gilbert at Sharecast.com