Knights Group Holdings plc

("Knights" or the "Group")

Half Year Results

Strong profit growth with a return to organic growth; in line with expectations

Knights, a fast-growing legal and professional services business in the UK, today announces its half year results for the six months ended 31 October 2023.

Financial highlights

·      Revenue up 6% to £75.3m (H1 FY23: £71.2m), in line with Board expectations

·      Strong growth in underlying EBITDA¹ of 25% to £18.2m (H1 FY23: £14.6m)

·      Reported profit before tax increased by 68% to £6.9m (H1 FY23: £4.1m)

·      Basic underlying EPS² up 21% to 9.99p (H1 FY23: 8.26p); reported Basic EPS up 54% to 5.34p (H1 FY23: 3.46p)

·      Debtor days improved to 31 (H1 FY23: 32); lock up³ improved to 93 days (H1 FY23: 103 days)

·      Good cash conversion⁴ of 69% (H1 FY23: 57%)

·      Net debt⁵ of £38.3m, (H1 FY23: £35.6m, FY23: £29.2m) after a cash outlay of c.£7.5m relating to acquisition consideration and related non underlying costs

·      Interim dividend 1.61p per share (H1 FY23: 1.53p per share)

Strategic and operational highlights

Leveraging our increased scale, strong reputation and differentiated model

·      20 senior fee earners hired in the period, up from nine in H1 FY23

·      Significant reduction in staff churn from 11% to 6%

·      Grown share of larger client spend

·      Pricing strategy embedded, with clients recognising the strong value of our premium service

·      Continued cost discipline, leveraging post-acquisition synergies and driving efficiencies across the Group

Acquisitions providing a platform for organic growth

·      Expanded presence in the North, with acquisitions of St James' Law in Newcastle and Baines Wilson in Carlisle which have integrated well and are performing as expected

·      Acquisitions providing excellent platforms for organic growth through recruitment; five partners already hired into each of Bristol (entered Feb 2023) and Newcastle (entered May 2023)

Board changes

·      Appointment of Dave Wilson as non-executive Chairman, bringing extensive PLC, international board-level and operational experience

Current trading and outlook

·      Trading continuing in line with the Board's expectations

·      New £70m revolving credit facility agreed in November 2023

·      Confident in the resilience of the business and its ability to attract and retain quality talent and clients, despite macroeconomic pressures

·      Focussing on driving organic growth, efficiencies and strengthening platform for future acquisitions

David Beech, CEO of Knights, commented:

"Knights has delivered a good performance in the period, reflecting our sharp focus on driving profitability and organic growth and the resilience provided by our diversified services, capabilities, and client base.

"We are delighted with the strong momentum in recruitment and retention in the half, which is testament to the attractiveness of our scale, reputation and model, the efforts of our client service directors, and enhancements we have made to our employee proposition, benefits and engagement.  Together with improved retention across the business, this influx of high-calibre talent will underpin organic growth in the future.

"We continue to expand our relationships with larger clients who increasingly recognise the benefits of Knights' premium, diversified offering and collaborative, corporatised model.

"Whilst mindful of macroeconomic conditions, trading in the second half is in line with the Board's expectations and we continue to focus on driving organic growth and efficiency, providing a strong platform for future acquisitions."

A presentation of the results will be made to analysts and investors at 9.00am this morning. To register for access, or for any other enquiries, please contact MHP Group on: Knights@mhpgroup.com.

¹   Underlying EBITDA is operating profit before depreciation, amortisation and non-underlying items (including non-underlying share based payment expenses). 

² Underlying PBT is before amortisation of acquired intangibles, non-underlying costs relating to acquisitions, non-recurring finance costs, restructuring costs in the reporting period, and non-underlying share based payments. Underlying EPS excludes these items and the tax related to these items. The Board believes that these underlying figures provide a more meaningful measure of the Group's underlying performance.

³  Lock up is calculated as the combined debtor and WIP days as at a point in time.  Debtor days are calculated on a count back basis using the gross debtors at the period end and compared with total fees raised over prior months. WIP days are calculated based on the gross work in progress (excluding that relating to clinical negligence claims, insolvency, and ground rents, as these matters operate mainly on a conditional fee arrangement and a different profile to the rest of the business) and calculating how many days billing this relates to, based on average fees (again excluding clinical negligence claims, insolvency, and ground rents fees) per month for the last 3 months.  Lock up days excludes the impact of acquisitions in the last quarter of the reporting period.

⁴  Cash conversion is calculated as the total of net cash from operations, tax paid and payments of lease interest and lease finance liabilities under IFRS 16, divided by the underlying profit after tax, which is calculated from profit after tax by adding back amortisation of acquired intangibles, non-underlying costs relating to acquisitions, non-recurring finance costs, restructuring costs in the reporting period, and non-underlying share based payments and the tax in respect of these costs. 

⁵  Net debt includes cash and cash equivalents, borrowings and acquired debt but excludes lease liabilities.

These footnotes apply throughout the RNS.

 Enquiries 

Notes to Editors

Knights is a legal and professional services business, ranked within the UK's top 50 largest law firms by revenue. Knights was one of the first law firms in the UK to move from the traditional partnership model to a corporate structure in 2012 and has since grown rapidly. Knights has specialists in all key areas of corporate and commercial law so that it can offer end-to-end support to businesses of all sizes and in all sectors. It is focussed on key UK markets outside London and currently operates from 23 offices located in Birmingham, Brighton, Bristol, Carlisle, Cheltenham, Chester, Exeter, Kings Hill, Leeds, Leicester, Lincoln, Manchester, Newbury, Newcastle-upon-Tyne, Nottingham, Oxford, Portsmouth, Sheffield, Stoke, Teesside, Weybridge, Wilmslow and York.

Chief Executive's Review 

Introduction

The Group has performed in line with the Board's expectations in the first half, with a return to organic revenue growth and strong growth in profits, as we continue to execute our strategy by focusing on growth in underlying EBITDA. 

Underlying EBITDA increased by 25% to £18.2m, reflecting an increase in underlying EBITDA margin to 24.2% (H1 FY23: 20.5%) driven by an increase in interest receivable on client monies of £3.8m.  Underlying PBT also increased by 29% to £11.6m, compared to the prior half year period, resulting in an increase in underlying PBT margin from 12.6% to 15.4%.

Revenue increased by 6% to £75.3m, delivering overall organic growth of 3.3% (0.4% H1 FY23).  Pleasingly, excluding the more cyclical residential property and corporate work, the business achieved 9% organic growth, demonstrating a resilient performance from Knights' diversified range of specialisms serving a broad spectrum of sectors. Growth in non-cyclical markets, particularly Private Wealth, Dispute Resolution and our growing regulatory team, helped to offset the impact of the subdued housing and corporate M&A markets.

We are creating greater momentum in the business, driven by a return to working in our offices, improving pricing and cost discipline, by securing a greater share of our clients' spend, and through the attraction and retention of talent, as we leverage our greater size and growing reputation.

Our prior year acquisitions, Coffin Mew, Meade King and Globe Consultants are performing as expected given the current macro-economic conditions, and the first half acquisitions of St James Law and Baines Wilson have integrated to plan, consolidating our coverage across most of England, outside the capital.

We have maintained our disciplined approach to cash collection, resulting in debtor days of 31 as at 31 October 2023 (31 October 2022: 32 days, 30 April 2023: 30 days), with total lock-up improving to 93 days compared to 103 days at 31 October 2022 and 87 days as at 30 April 2023.  

This focus on cash has resulted in net debt of £38.3m at 31 October 2023 (H1 FY23: £35.6m, FY23: £29.2m), after £7.5m of acquisition consideration, debt and related costs in the first half, providing significant headroom against the Group's recently increased £70m revolving credit facility.  Although this represents an increase in net debt from the balance as at 30 April 2023, this is principally due to payment of consideration for current and prior year acquisitions and first half weighting of certain payments such as dividends, corporation tax and other overheads. 

As we are building a national business with a strong reputation for providing a premium service, our near-term focus is on driving organic growth through attracting and retaining high calibre people, pricing our services for the high value we deliver, and providing more services to our larger clients, all supported by greater capability, consistency and efficiency across the business.

A more favourable market for attracting and retaining talent

We are attracting high calibre talent to Knights due to our increasing size and reputation and our differentiated ownership and business model, which offers an attractive alternative to the financial commitment and risk associated with traditional equity partnership-style models. 

We recruited 20 senior fee earning professionals in the first half, compared to nine in the same period last year, by focusing more of our resources on recruitment, with our Client Services Directors becoming more engaged in our recruitment strategy.

Importantly, we have also seen churn reduce significantly, to six percent, compared with 11% for the same period last year, meaning that our higher levels of recruitment will have a greater positive impact on our organic growth.  Although assisted by market conditions, we have also introduced our employee value proposition alongside an upgraded employee benefits package and regular regional conferences, all of which enhances our employee experience and increases our retention levels. Our decision to return to office-based working a year ago is also paying dividends in terms of creating stronger cultural cohesion, people being able to work together more seamlessly, and better development opportunities for the less experienced members of our team.

Leveraging the clear value our premium service delivers at scale

Having invested in scaling up our business considerably in recent years while establishing greater awareness of our brand and differentiated offering, and having built a strong reputation for high quality service delivered consistently nationally, we have focussed primarily on leveraging this platform during the first half.

We started to benefit from the Group's pricing strategy in the first half, with a pricing increase implemented from May 2023 now embedded within our people and across all new client engagements. We have been encouraged by the traction this has gained, without adverse impact on relationships as clients continue to recognise the strong value Knights delivers through its premium service without a London cost base.

We have also continued to grow our share of the spend by our larger clients.

Our unique way of working together as one collaborative team across our 23 offices is becoming deeply embedded within our culture. Our approach to the delivery of client services, led by 275 Partners who are always available to clients without the distraction of managing a business, is gaining momentum and awareness in the business and private wealth sectors.

Driving consistency and efficiency across the business

We have always managed costs tightly as part of our model, and there are a number of areas where we have continued to drive efficiencies during the first half, whilst also ensuring our professionals are consistently well supported across the business.

For instance, we have moved to a more centralised platform for HR and compliance, resulting in cost savings. We also continue to leverage post-acquisition synergies, continuing to review our property portfolio and making changes where appropriate to crystalise other savings, such as the cost of professional indemnity insurance.

We will continue to drive efficiencies and the consistent streamlining of processes across the business to retain tight control of costs.

Board

As previously announced, Dave Wilson was appointed as non-executive Chair of the Board on 15 November 2023, bringing with him over 30 years' international, board-level and operational experience. He previously spent 12 years in senior roles, including as Deputy Chief Executive Officer at AIM-listed GB Group Plc, during which time that business grew both organically, and through the successful completion of 14 acquisitions, scaled from a market cap of £14 million to £1.8 billion. He is also currently non-executive Chair of AIM-listed media group, LBG Media Plc, and a non-executive director of musicMagpie Plc.

Bal Johal stepped down from the Board at the same time, having served as non-executive Chair of Knights since 2012. On behalf of the Board, I reiterate our thanks to him for his immense contribution to the business over the past 11 years, during which time the Group has seen significant growth.

Acquisitions

The integration of prior year acquisitions, Coffin Mew (Portsmouth), Meade King (Bristol) and Globe Consultants Limited (Lincoln), has been successful and all are performing well, despite challenging market conditions for the residential property sector in the period.

During the first half, the Group completed the acquisition of St James Law (Newcastle) and Baines Wilson (Carlisle), further strengthening the Group's presence in the North.  St James Law brought to the Group an independent full service commercial law firm based in Newcastle, and Baines Wilson brought one of the leading independent law firms in the North West, offering Corporate, Real Estate, Dispute Resolution and Employment services. 

Both businesses have integrated well and are performing in line with the Board's expectations.

Our acquisitions in Bristol and Newcastle, in particular, provide excellent platforms for further organic growth through the recruitment of professionals in those key regional markets for professional services, and we have already hired five partners in each of these new locations.

New and extended £70m Revolving Credit Facility agreed

In November, we announced a new, extended revolving credit facility providing total committed funding of £70m until November 2026, split between HSBC UK, AIB (GB) and NatWest, replacing the former £60m facility. This provides the Group with the headroom and flexibility to continue to execute our strategy, scale our business and accelerate organic growth, complemented by selective acquisitions.

Dividend

The Group's dividend policy balances the retention of profits to fund our long-term growth strategy with providing shareholders with a return as our growth strategy delivers strong results. In line with that policy, the Board is proposing an interim dividend of 1.61p per share (HY23 1.53p), an increase of 5%. The dividend will be payable on 15 March 2024 to shareholders on the register at 16 February 2024.

Current trading and outlook

The Group has continued to trade in line with the Board's expectations in the second half as we execute on our strategy which is delivering profitable, cash generative growth.

Whilst mindful of the current macroeconomic environment, we are encouraged that we are attracting and retaining high quality, talented professionals, have a healthy pipeline of opportunities with new and existing larger clients for our premium service, and that our diversified services, capabilities, and client base provide resilience.  We will continue to focus on driving organic growth and efficiency in the second half, providing a strong platform for further future acquisitions.

David Beech

CEO

Financial Review

I am pleased to report that for the first half of this year the Group has delivered  strong growth in underlying EBITDA of 25% to £18.2m (H1 FY23: £14.6m), good cash conversion⁴ and a net debt position in line with the Board expectations.

Revenue

Reported revenue for the period is £75.3m, compared to £71.2m for the same period last year, an increase of 6%.  Of this increase £2.1m related to growth in organic revenues of 3.3%; £2.1m related to H1 FY 24 acquisitions and £0.6m represented the increase in revenues from FY 23 acquisitions over the comparable period of ownership in the prior year.  The disposal of HPL in July FY23 has resulted in a £0.7m decrease in revenue compared to the same period last year. 

Revenue from acquisitions

Acquisitions completed during FY23

The acquisitions of Globe Consultants, Meade King and Coffin Mew completed during FY23. All acquisitions are well integrated and other than Coffin Mew, which has been adversely impacted by the downturn in the housing market, the acquisitions are currently performing ahead of expectations, taking into account the anticipated retention of 80% of revenues post-acquisition.  As expected, these acquisitions have provided good opportunities for organic growth with good recruitment into these acquired offices in H1 FY24 which will contribute towards organic growth in H2 FY24 and beyond.

Acquisitions completed during the period to 31 October 2023

In the period to 31 October 2023, we acquired Baines Wilson and St James Law.  These acquisitions have integrated well and are performing as expected.  Again, these acquisitions are providing good opportunities for recruitment.

Organic growth

We are pleased to report a return to organic growth in the period, of 3.3%. Excluding the macro-economic impact of the increased cost of debt on the housing market (a 20% reduction) and corporate transactions (a 15% reduction), organic growth was 9.5%.  Strong growth in non-cyclical areas of the business such as Private Wealth and Dispute Resolution, and our growing regulatory team has contributed to the growth as a result of improved pricing and quality of work undertaken due to our increased scale.

Employee costs

Total staff costs as a percentage of revenue were 63.5% for H1 FY24 (H1 FY23: 61.7%).  The increase in staff costs reflected an increase in both direct and indirect staff costs. We have invested in new senior recruits to drive future growth (35 senior recruits in H2 FY23 and H1 FY24) who typically take 6-9 months to generate expected run rate revenue, together with investment in additional client service directors leaving the Group well positioned for growth going forward.

Other operating charges

Other operating charges have decreased slightly to 19.4% of revenue H1 FY24 (H1 FY23: 20.0%).  We continue to drive efficiencies from the cost base, including from acquisitions whilst continuing to invest in growth.

Other operating income

Other operating income has increased by £3.6m to £5.5m from H1 FY23 to H1 FY24, as a result of increased interest income arising from interest earned on client monies net of monies paid out to clients. As a large Group consistently handling significant amounts of client monies, we are able to attract a higher level of interest than individual clients could achieve on an individual instant access account.  This results in a net benefit to the Group, with approximately 15% of interest received being paid out to clients, which typically equates to what they would receive in an instant access account.

Underlying EBITDA¹

Underlying EBITDA excludes non-underlying operating costs which consist of transaction costs in relation to acquisitions, contingent consideration and one-off restructuring and professional costs incurred mainly as a result of the streamlining of the support function in relation to acquisitions or strategic reorganisations.  The Board considers this to be a key metric to measure business performance.

During the period, underlying EBITDA increased by £3.6m to £18.2m (H1 FY23: £14.6m) representing an increase in margin to 24.2% (H1 FY23: 20.5%), benefitting from an increase in the net interest earned on client monies in the period, partly offset by increased staff costs as a percentage of revenue.

IFRS 16 depreciation and finance charges

The IFRS 16 rental and finance charges reflects the accounting charge in respect of all leases with a term of over one year.  The total costs in the half year are comparable to the same period prior year, as the Group continues to leverage its property costs.

Depreciation and amortisation charges

The increased charge from £1.2m in H1 FY23 to £1.5m in H1 FY24 is due to continued investment in systems and investment in property upgrades/refurbishment to support growth.

Finance charges

Finance charges, excluding lease interest, increased by £0.6m in the period, to £1.5m (H1 FY23: £0.9m) driven mainly by the higher level of UK interest rates.

Underlying Profit Before Tax²

Underlying profit before tax excludes amortisation of acquired intangibles, transaction and onerous lease costs in relation to acquisitions, contingent consideration and one off restructuring and professional costs incurred mainly as a result of the streamlining of the support function in relation to acquisitions or strategic reorganisations.

Underlying profit before tax has been calculated as an alternative performance measure to provide a more meaningful measure and to aid comparison of the profitability of the underlying business to prior periods. 

The Group's underlying profit before tax has increased by 29% to £11.6m (H1 FY23: £9.0m).

The underlying profit before tax margin has increased to 15.4% compared to 12.6% in the prior period, benefitting from an increase in the EBITDA margin, offset by an increase in interest payable.

Reported Profit Before Tax

The reported profit before tax in the period has increased by 68% to £6.9m (H1 FY23: £4.1m) driven by an increase in the underlying profit before tax and a reduction in the level of non-underlying charges in the period.

Taxation

The corporation tax charge for the period was £2.3m (H1 FY23 (£1.2m) giving an increased effective rate of tax of 33% (H1 FY23 29%) primarily reflecting the increase in the corporation tax rate from 19% to 25% in the period.

The effective rate of tax on the underlying profit of the business was 26% (H1 FY23 22%)

Earnings per Share (EPS)

Basic EPS in the period increased by 54% to 5.34p (H1 FY23: 3.46p per share). Taking account of the dilutive impact of potential share options, the basic Diluted EPS has increased by 51% or 1.76p per share to 5.21p per share (H1 FY23: 3.45p).

To provide a comparison year on year excluding one off items, underlying EPS² has also been calculated giving an increase of 21% to 9.99p per share (H1 FY23: 8.26p per share).  The weighted average number of shares used to calculate the undiluted EPS for the half year was 85,816,798 (H1 FY23: 85,382,872).

Dividend

In line with the Group's progressive dividend policy, and to reflect the improved performance of the Group, balanced with the Board's commitment to continue to reinvest the profits of the Group to fund future strategic growth plans, the Board has declared an interim dividend of 1.61p per share (H1 FY23 1.53p per share).  This will be payable on 15 March 2024 to shareholders on the register on 16 February 2024.

Balance Sheet

The Group's net assets increased by £3.3m from £92.8m as at 30 April 2023 to £96.1m as at 31 October 2023, primarily due to profits generated in the period and credits in relation to share based payments during the period, less the dividend paid in respect of the year ended 30 April 2023 of £2.1m.

Working capital and cash management

Net working capital has increased to £57.2m as at 31 October 2023 (31 October 2022: £50.5m).  The key driver behind this is a £5.3m increase in the level of contract assets at the period end compared to the comparative period last year, primarily due to a £1.2m increase in WIP from acquisitions post 1 November 2022 and an increase in the contract assets within our CL Medilaw business (£3.8m increase), due to continued growth in this area.

The management of lock up³ continues to be a fundamental KPI for the Group and is a key focus for the Board, Client Service Directors and the wider management team.  As at 31 October 2023 lock up was 93 days (31 October 2022: 103 days) broken down as 31 debtor days and 62 WIP days (31 October 2022: 32 debtor days and 71 WIP days).  Due to the disproportionate amount of time that it takes to conclude certain work types such as our CL Medilaw and Insolvency matters these worktypes are excluded from our WIP days calculation so as not to deter the majority of the business from focussing on achieving its excellent lock up days.  If WIP days were calculated including all WIP of the Group this would give WIP days of 105 days and hence a total lock up with no exclusions of 136 days as at 31 October 2023 (31 October 2022: 131 days).

Cash Flow

Underlying cash conversion⁴                                                                                            69%                             57%

Cash generation continues to be a key focus for the management team.  As a result of the continued focus on this and specifically the management of lock up, the Group generated underlying operating cashflows of £5.9m during the period, a conversion rate of 69% on underlying profits.  This good cash generation in the period has resulted in net debt of £38.3m as at 31 October 2023 (30 April 2023: £29.2m) after a cash outlay of c.£7.5m relating to acquisition consideration and related non underlying costs.

The increase in corporation tax paid in the period compared to the comparable period last year is due to the expected increase in profitability of the Group, an increase in corporation tax rates from 19% to 25% and the payment in H1 23 being reduced due to an opening debtor of £1.8m as at the start of the year.

The table below shows a reconciliation of the key cash flow movements impacting the movement in net debt.

Net Debt⁵

On 7 November 2023 we renewed and extended our RCF facility to £70m, committed until November 2026.  The Group has £31m headroom in the RCF facility as at 31 October 2023 (and is well within its key covenants).  For banking purposes our leverage as at 31 October 2023 was 1.3 times EBITDA (as defined for covenant purposes) Interest is payable on the loan at a margin of between 1.65% and 2.55% above Sonia dependent on leverage.

The Group is, therefore, in a strong financial position with the headroom and flexibility to continue to execute our growth strategy.

Kate Lewis

CFO

Knights Group Holdings plc

Consolidated Statement of Comprehensive Income

For the 6 month period ended 31 October 2023