Last week’s warning by Knights Group Holdings (LON:KGH) of lower than expected profits is another blow for this acquisition-hungry legal services business. Shares dropped by 50% from 365p to 181p then continued to drop to as low as 143p as the week went on. This week shares have recovered marginally with shares now trading at 164p.
Knights now expects to deliver revenue of around £126m with pre-tax profits of around £18m for the year ending 30 April 2022. There were no significant losses of clients or fee earners and the group stated that the reason for the slowdown in growth was because of greater illness rates amongst staff and a slowdown in corporate work.
This is particularly disappointing as Knights had a promising H1 2021 as well as spending much of last year focusing on pricing – reviewing charge out rates, improving recovery of time recorded. As a result, revenue for the first half of 2021 increased by 29% to £59.7m (H1 21: £46.2m), with organic growth contributing around 9% which equates to around £4.4m. Income from acquisitions also grew by £9.1m in H1. Pre-tax profits increased by 26% to £7.6m compared to £6.0m in the same period last year.
Langleys’ acquisition
The second lot of bad news came a day or two later with the completion of the acquisition of Langleys Solicitors. At the beginning of this year Knights announced the acquisition of the York and Lincoln-based firm when Knight’s share price was around 400p. However, on completion the share price had dropped to 143p. As a result, the £2.75m that Knights would have issued in new ordinary shares is instead to be paid in cash in three equal instalments on 2 January 2023, 2 January 2024 and 2 January 2025.
Colin White, law specialist and head of M&A at Ortus Group comments on Knights’ profit warning: “Across the board law firms have done well this year and whilst there are always outliers, with Knights’ spread of work and geography, their drop in revenue cannot be just down to Omicron.”
“With regard to the Langleys’ completion, we are all of course, looking from the outside in, but it seems to me that they have had to offer cash instead of shares in order to get the deal over the line. Has Knights overpaid? Possibly. Also, have they had to borrow money to fund the acquisition?”
The magic circle of the regions
Knights claims that the opportunity for the company to be in the leading position in key legal services markets outside London remains substantial and that it is recent events that are holding the business back.
It has certainly grown substantially since listing in June 2018, having made around 15 acquisitions to date. Among them are Spearing Waite and Cummins Solicitors, which are both Leicester-based, BrookStreet des Roches which is based in Oxford and Sheffield-based Keebles. The company now has offices in 17 different locations with Santander, Dunelm and M&G said to be on the client roster.
Knights’ USP is that it has corporatised what is traditionally a law firm partnership model. CEO, David Beech, has stated that they plan to accelerate growth and to be the magic circle of the regions. What this means in practice is that lawyers will be separated away from ownership and management building a corporate culture that moves away from teams and offices competing with each other.
“It is easy to be critical of the corporatised model when we look at the traditional lens of legal practice. But if they are still making money and if they are building a legacy firm that has value, it is up to the shareholders to decide if it is working,” adds White.
