Here’s why Knights Group Holdings shares soared 28% last week

Knights Group Holdings shares soared by 28% last week in a relief rally sparked by results in line with forecasts. Where does this leave the shares now?

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On days when stock markets are open, one of the first things I do is to check what’s happening to share prices. In particular, I check each day’s biggest risers and fallers on the London Stock Exchange. And last week, a UK-listed stock that I didn’t recognise went surging up the winners’ table. Thus, my attention was drawn to Knights Group Holdings (LSE: KGH) shares.

The shares soar, then slump

It’s been tough recently for owners of the shares. The legal services group floated in London on 29 June 2018. After their first day of dealing, the group’s shares closed at 175p.

Over the next two years or so, Knights Group stock went on a tear, reaching an all-time intra-day high of 500p on 3, 7 and 8 September 2020. However, the shares then started to slide, ending 2020 at 393.5p and closing out 2021 at 410p.

Alas, 2022 has been really brutal for this stock. On 21 March, the shares closed at 365p, but more than halved the next day. Following a profit warning issued on 22 March, the shares crashed 50.7% to close at just 180p. This meltdown continued into the summer, with the stock plunging to a record intra-day low of 83.8p on 1 July.

This small-cap stock has surged this month

On 11 July, Knights Group shares closed at 95p, 11.2p above their all-time low. But on Tuesday (12 July), the group released its full-year results. This lit a fire under the stock, which leapt to close at 116p. The stock then closed at 127p on 13 July. That’s a hefty gain of more than a third (33.7%) in two days.

On Friday, this stock closed at 125.5p, valuing the company at £107.7m. So KGH shares shot up by 28.1% last week — some relief for its suffering shareholders. Yet they remain 71.8% down over 12 months. Ouch.

In-line results sparked a relief rally

One reason why Knights Group shares leapt last week was an old-fashioned relief rally. In its full-year results, the firm unveiled revenues up 22% to £125.6m, in line with the forecast in its spring update. Underlying profit slipped by 2% to £18.1m, but pre-tax profit crashed by 80% to £1.1m, after subtracting acquisition costs of £13.2m.

The group blamed a tough fourth quarter on “unusually high levels of employee sickness and disruption” caused by Covid-19 variants. However, in one bit of good news for shareholders, the company announced a final dividend of 2.04p, boosting the full-year dividend to 3.5p.

How do the shares stack up today?

Knights Group is very much a growth stock, as the company’s expansion strategy involves aggressively buying up regional law practices. As a result, the group’s balance sheet includes over £33m of debt and nearly £47m of lease liabilities. That’s lot of borrowing for a small-cap company. However, analysts expect profits to recover in 2022-23, meaning the shares trade on a forward earnings multiple of around five. The dividend yield of 2.8% a year is a bonus, but payouts could be cut if earnings prove volatile.

As a value investor, Knights Group shares are not my cup of tea. Hence, I’ll leave them on the shelf!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Cliffdarcy has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services, such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool, we believe that considering a diverse range of insights makes us better investors.

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