Beech: Building value through acquisitions
Growing profit before tax (PBT) at listed law firm Knights is evidence of the success of its consolidation strategy, chief executive David Beech said today.
Underlying PBT in the six months to 31 October 2024 increased by 26% to nearly £15m, with the underlying PBT margin up three percentage points for the second year running, this time to 18.4%. The gross profit margin increased similarly to 50.5%.
Revenue grew 5.4% to more than £79m, “driven predominantly by acquisitions”, investors were told today.
Mr Beech said the PBT was three times the full-year equivalent when Knights listed in April 2018, while staff numbers have grown from 430 to 1,335 people, “demonstrating our ability to build value through acquisitions, integration and retaining higher performing people”.
He went on: “It is particularly interesting to see this approach being validated by the considerable levels of investment from private equity in a parallel professional service, accountancy.”
The results said organic revenue growth was broadly flat, “with good growth in our CL Medilaw business [a medical negligence and serious injury practice], residential housing and commercial real estate offsetting the subdued remortgage market and corporate M&A markets, reflecting the resilience of our diversified service offering”.
Mr Beech said the firm has been “strategically reducing work in lower margin areas”, while its regional footprint “has insulated us from some of the financial pressures seen in the City, including significant salary and property cost inflation”.
Knights’ share price has been becalmed over the last couple of years, with our review of listed legal businesses showing it ended 2024 at 105p, 6p lower than where it started, but it has started this year well and was up to 123p in trading today.
In July, it announced its first acquisition in over a year and 22nd in total, a £12.5m deal for West Midlands firm Thursfields Legal, which completed in September. This was “performing in line with our expectations”, Knights said, while 2023 acquisitions, Baines Wilson and St James’ Law, were fully integrated, with Carlisle-based Baines Wilson “in particular trading ahead of expectations during the first half”.
Mr Beech added: “We continue to have a healthy pipeline of acquisition opportunities, which we expect to pursue on a selective basis.”
During the six months, debtor days rose slightly to 33, as did lock-up days to 98.
Knights’ net debt increased to £50m, “predominantly driven by £8.9m initial and deferred acquisition costs and we were pleased to have agreed an extended revolving credit facility, providing the group with significant headroom to execute its value-accretive acquisition strategy as suitable opportunities arise”.
Staff churn was 10% for the six months, while moves to “streamline and centralise several internal business functions” meant the firm has a 3.7:1 fee-earner to non-fee-earner ratio, placing it “at the leading edge of our industry in terms of operating an efficient and lean delivery platform”.
Knights is adopting artificial intelligence (AI) “in a measured way”, with a new AI-enabled document management system expected to go live in the next financial year.
The board has proposed an interim dividend of 1.76p per share, 9% more than last year.
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