Berenberg slashes target price on Knights Group

Analysts at Berenberg slashed their target price on legal and professional services business Knights Group from 410.0p to 165.0p on Monday following the firm's recent trading update.

Berenberg noted that Knights' full-year update last week had guided to an expected 3.7% revenue downgrade to £126.0m for 2022, with complete drop-through driving a 23.1% downgrade at the adjusted pre-tax profit level to £18.0m.

The German bank, which has a 'hold' rating on the stock, also highlighted that company had cited the impact of the Omicron Covid-19 variant, as well as a softening in business confidence and an associated slowdown in corporate work, as being the main drivers.

"Management has suggested it prudent to revise FY23 organic growth estimates down to circa 5% with margins rebuilding to historical levels 'over time'," said Berenberg.

Berenberg stated that following a significant de-rating for the stock, with shares now on a 7.6x full-year price-to-earnings ratio, it was also easy to argue a 'buy' case for Knights if one was to believe the model was capable of being sustained over the medium to long run.

However, Berenberg said it continues to question Knights' aggressive M&A strategy and suggestion of high churn while it awaits evidence of the multi-year success of acquisitions.

"The model's reliance on being able to use paper as an acquisition currency and enjoy a degree of multiple arbitrage is also now heavily strained. When these concerns are combined with tempered guidance on margins and organic growth, we believe the current valuation is not unreasonable, especially when viewed relative to peers with fewer structural questions," said the analysts.