A good second half performance; operational resilience in the face of COVID-19
Knights Group Holdings plc (AIM: KGH), one of the UK's fastest growing legal and professional services businesses, today provides a trading update for the year ended 30 April 2020.
Full year trading update
The Group expects to deliver revenue for the full year of circa £74.0m, representing a c.40% increase compared to the prior year (2019: £52.7m) and including organic revenue growth of approximately 10%. Underlying PBT(1) is anticipated to be circa £13.5m, a c.44% increase from £9.4m in the prior year on an IFRS 16 basis , and representing a marked increase in margin in the second half compared to the first, as anticipated. This reflects a strong performance through the second half of its financial year including through the initial lockdown period in March. However, the Group felt the impact of the lockdown in April due to the economic environment and a stalling of activity by other (counterparty) law firms during April which resulted in short term disruption to the Group’s ability to transact on behalf of its clients.
Balance sheet and liquidity
The Group has achieved a high level of cash conversion, as it continues its focus on delivering industry-leading working capital management through robust systems for and a strong culture of day-to-day cash collection, as well as the implementation of this approach across recent acquisitions. This resulted in a better than expected year end net debt position of £15.9m (31 October 2019: £17.1m, 30 April 2019: £14.1m), representing less than 1 times Underlying(1) EBITDA.
Knights, therefore, retains a strong balance sheet with a conservative gearing level and good liquidity. Having recently extended its revolving credit facility with HSBC UK and Allied Irish Bank (GB) to £40m until June 2023, the Group has a total of c.£24m in undrawn committed facilities for working capital purposes.
As announced on 26 March, the Group moved quickly to put in place a number of prudent cost saving and efficiency measures in relation to the uncertainty created by COVID-19, demonstrating the benefit of a corporate structure in which the senior leadership were able to act with agility whilst supporting its lawyers to remain focused on delivering value to clients. Knights’ people, and its clients, have responded well to home working and this is planned to continue until September at the earliest.
The Board believes that the swift actions taken position the Group well to trade through the current environment, which has resulted in a circa 20% decline in instructions in the last few weeks. However, the Board is encouraged by early signs that market conditions have stabilised following the particular disruption experienced since early April.
The recent acquisitions, which have integrated and are performing well, have built upon the Group’s already resilient business model being a well-balanced, full service offering and highly diversified revenues by client, sector and geography. The Group is seeing the benefit of this model, with higher levels of disputes and employment work mitigating a reduction in corporate transactions and marginally lower levels of activity in certain areas of the Group’s real estate work. The increase in the number of fee earners in the year to over 900, despite the previously announced headcount reductions, further adds to the resilience and diversity of the Group.
Despite the Group's strong financial position, the Board has decided it is not appropriate to recommend paying a dividend given the recent cost saving measures.
David Beech, CEO of Knights, commented:
“Our early actions have positioned the Group well for the current market environment and I am proud of the way in which our people have responded with such agility to working from home as they continue to deliver outstanding service to our clients.”
“We are pleased with how our recent acquisitions have performed, having most recently successfully completed and integrated Shulmans and ASB.”
“We are confident that our model and culture will enable us to emerge in a stronger position from this current environment, and that remains our focus in the near term. Beyond the near term, we anticipate that COVID-19 will only accentuate the opportunities for our resilient, well-invested, diversified and cash generative business in the highly fragmented and often under-invested market for legal services outside London.”
Knights expects to provide a further update on trading with its full year results announcement at the end of July.
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(1) Underlying PBT is before amortisation of goodwill; Underlying PBT and EBITDA are before non-underlying costs relating to acquisitions, non-recurring finance costs in both periods, restructuring costs in the reporting period, and non-underlying share based payments. The Board believes that these adjusted figures provide a more meaningful measure of the Group's underlying performance.