Berenberg initiates coverage on DWF Group at 'buy'

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