Here, I’ll look at a share I reckon is capable of staging a turnaround over the next few years.

Knights

Knights Group‘s (LSE:KGH) an AIM-listed legal and professional services firm that released its annual results Monday (15 September). While the market responded positively, pushing the share price up 10% to 162p, that still leaves Knights down 65% in five years.

The damage was done in March 2022 when the stock fell off a cliff after a profit warning. As we can see, it has yet to fully recover.

Yet the company continues to expand. In the 12 months to 30 April, revenue increased 8% to £162m, up from £74m in 2020. The group recruited 51 senior fee earners, 28% more than the prior year, while its increasingly diverse service offer is attracting more clients. 

Underlying EBITDA jumped 11% to £43m, while underlying pre-tax profit rose by the same amount to £28m, with a 40 bps increase in margin to 17.3%. Including acquisition-related costs though, reported pre-tax profit was down 17% to £12.3m.

Encouragingly, management said trading had started well this year, with further profitable growth expected over the medium term. The total dividend was hiked nearly 10% to 3.05p.

CEO David Beech said: “This has been a year of step changes for the business, with strategic progress and a strengthened leadership team embedding enhanced operational discipline — all underpinning the Group’s platform for future growth.” 

Growing by acquisition

Knights has specialists in all key areas of corporate and commercial law, as well as private wealth services. It focuses on markets outside of London where it has snapped up multiple firms over the past few years.

In the first half, the company acquired Thursfields Legal, enhancing its presence in the Midlands. In the second half, it bought IBB Law for £30m, its biggest acquisition to date.  

Since the end of April, it’s added Birkett Long, expanding its legal and wealth advisory services, and Rix & Kay to boost its presence in Kent and Sussex. Le Gros Solicitors in Cardiff was also purchased.

Of course, acquisitions add risk, especially as the group starts to eye larger deals. In economic downturns, newly acquired firms may underperform. And it’s worth noting that there was no organic growth last year, which was disappointing.

Net debt also rose sharply due to acquisitions, from £35.2m to £64.8m. Still, a net debt-to-EBITDA ratio of 1.6 times doesn’t appear stretched.

Cheap-looking stock

Analysts currently expect full-year revenue to rise 18% to £191m, with a similar increase in adjusted earnings. This puts the stock on a low forward price-to-earnings ratio of 6.2.

At this price, I do see value, especially when there’s a 3% dividend yield on offer too.

The UK legal services market remains extremely fragmented. So Knights should have no shortage of opportunities to continue expanding its regional footprint in the coming years.

Despite risks associated with Knights’ acquisitive model, I think the stock’s worth considering as a buy today.

The post 1 UK stock to consider buying for its turnaround potential appeared first on The Motley Fool UK.

By contrast, there’s the value trap. This is a stock that looks cheap on paper but stays that way due to weak growth, declining earnings, or other problems that prevent a proper recovery. One notorious example is BT Group, whose share price was higher decades ago than it is today. 

Here, I’ll highlight a small-cap stock that I think does look good value and might be worth considering for long-term investors.

Growing law firm

The share in question is AIM-listed Knights Group (LSE: KGH). This is a legal and professional services company that operates as a corporate-style business rather than a traditional partnership-based law firm.

What does that mean? One difference is that the group offers a wider range of services, spanning corporate law, real estate, employment, dispute resolution and more. It also offers advisory services in debt management and wealth planning, and is moving into growth areas like new homes and immigration. 

Over the past few years, it’s snapped up more than two dozen local law firms to expand its expertise and geographical presence. Indeed, it’s now among the leading legal and professional services businesses outside London. 

Revenue has grown briskly from £52.7m in 2019 to a forecast £164m this financial year (ending April). Earnings have also motored higher, growing at a compound annual rate of about 26% over that time.

The company also pays a dividend, with the forecast yield for next year sitting at 4.3%. This prospective payout is comfortably covered almost five times over by forecast earnings. While not guaranteed, this at least suggests there’s significant scope for dividend growth in future.

Some issues to bear in mind

As the chart above shows, the share price tumbled in early 2022. This came after the company issued a profit warning, blaming Covid-related office absences for disrupting operations. Fair enough.

But another factor since then has been higher interest rates. At the end of October, Knights had £50m in net debt, which is quite high for a company with a £101m market cap.

Now, the interest coverage ratio is around 4.1, meaning the debt is manageable and the firm can meet its interest payments. However, high rates could slow its acquisition-driven growth. In fact, next year’s forecast revenue growth of 6%-7% is well below that of earlier years.

Meanwhile, a sluggish UK economy probably isn’t helping business.

My verdict

That said, I see a lot of value here. The stock currently sits at 118p, having fallen 76% since September 2020. This leaves it trading at an ultra-low price-to-earnings ratio of 4.7 for next year!

Looking ahead, earnings seem set to grow strongly as Knights expands into higher-margin legal services, while strategically reducing lower-margin areas like insolvency. And the interim dividend was hiked 9.3% earlier this month, meaning there’s growing income on offer.

Finally, once interest rates come down, the share price could recover strongly as borrowing costs ease and the economy steadily improves (hopefully).

With strong earnings growth, rising dividends, and a dirt-cheap valuation, Knights looks to be positioned to do well when market conditions improve. I reckon it’s worth considering.

The post 1 under-the-radar value stock down 76% to consider for an ISA appeared first on The Motley Fool UK.

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!

The post Here’s why Knights Group Holdings shares soared 28% last week appeared first on The Motley Fool UK.

Watch this space

Recent news coming out of Watches of Switzerland Group (LSE: WOSG) has been pretty spectacular. It leads me to believe the luxury retailer could be a sage buy before full-year financials on Thursday, 8 July.

The introduction of Covid-19 lockdowns and the subsequent closure of its shops couldn’t stop revenues rising in the last financial year. In fact, at £905.1m, sales in the 12 months to April 2021 jumped 13% to the top of end of expectations. Furthermore, income soared 82% in the final three months of the fiscal year as its stores reopened.

It’s said that buyers of big-ticket items prefer to see their purchases in the flesh before flashing the plastic. But the terrific performance of Watches of Switzerland runs counter to this idea. Online sales rocketed 121% year-on-year in financial 2021. And they soared 218% during the final three months of the period too.

Now, Watches of Switzerland shares don’t come cheap. This UK retail share trades on an enormous forward price-to-earnings (P/E) ratio of 34 times. It’s the sort of elevated valuation that could lead to a significant share price drop  if demand for its Rolexes, Omegas and other luxury timepieces begins to wane. I still think the business is a great buy, however, given the excellent progress it is making in the fast-growing e-commerce space, as well as in the US.

Another top UK share to buy

I’m also tempted to invest in Knights Group (LSE: KGH) before full-year results are unfurled on Wednesday, 14 July. Last time the legal services provider updated the market, it predicted that revenues for the 12 months to April would beat forecasts thanks to “good organic growth” in the second half.

Knights Group is a UK share with the bit between its teeth and its core business is firing on all cylinders. Though I wouldn’t just buy the company in anticipation of a sunny follow-up to May’s most recent release. The legal giant remains extremely active on the acquisitions trail to deliver supreme long-term profits growth. This month it sealed the takeover of Sheffield-based commercial lawyers Keebles. And it has its crosshairs trained on more M&A targets.

Chief executive David Beech recently commented that the business “expects to selectively execute on an attractive acquisition pipeline during the current year,” adding that the medium-to-long-term impact of Covid-19 has accentuated “the group’s acquisition opportunities in the highly fragmented market for legal services outside London.”

City analysts think annual earnings at Knights Group will rise 25% in financial 2022. This leaves the UK support share trading on a forward PEG ratio of just 0.7. It’s true that an acquisition-led growth strategy like that of Knights Group creates additional risks. Costs can unexpectedly rise and earnings contributions can disappoint from newly-purchased assets. But I still think the company is a top UK share to buy and particularly at recent prices.

The post 2 top UK shares to buy in July appeared first on The Motley Fool UK.