DSW Capital – trading on just 9.46 times historic, a mere 6.88 times current earnings ratio, with a 5.9% yield, and a 6.2% prospective! Shares 53p TP over 66p

27.05.2025

A couple of weeks ago, on Thursday 15th May, DSW Capital (LON:DSW) issued a positive Trading Update for its year to the end 0f March.

The group, which is a profitable, mid-market, challenger professional services licence network and owner of the Dow Schofield Watts and DR Solicitors brands, stated that its results for the period will be ahead of market expectations – which is a very good sign against such uncertain markets generally.

Upon looking at the group a little more closely after that Update, I now take the view that its shares offer both an attractive upside and useful yield.

The Business

Originally established in 2002, by three KPMG alumni, Dow Schofield Watts is one of the first platform models disrupting the traditional model of accounting professional services firms.

DSW Capital operates licensing arrangements with its businesses and has over 130 fee earners across 12 offices in the UK.

These businesses trade primarily under the Dow Schofield Watts and DR Solicitors brands.

The group’s vision is for its brands to become the most sought-after destinations for ambitious, entrepreneurial professionals to start and develop their own businesses.

Through a licensing model, it gives professionals the autonomy and flexibility to fulfil their potential, while bringing support benefits in recruitment, funding and infrastructure.

The DSW ‘challenger model’ attracts experienced, senior professionals, predominantly with a ‘Big 4’ accounting firm or ‘Magic Circle’ legal background, who want to launch their own businesses and recognise the value of DSW Capital's brands and the synergies which come from being part of the network.

The group aims to scale its agile model through organic growth, geographical expansion, additional service lines and acquisitions.

Its directors are targeting high-margin, complementary, niche service lines with a strong synergistic fit with the existing network.

It provides professionals with start-up funding and can take care of all aspects associated with the running of the ‘office’ including IT, compliance guidance, accounting, marketing, recruitment, people development support and banking.

That model enables its partners to hit the ground running and focus on growing their respective businesses, maximising their profit capabilities and building a legacy.

In return, it receives a percentage of the licensee’s revenue, and in some cases a percentage of the licensee’s profits.

Licensees are responsible for collecting their own cash from clients to fund partner drawings and pay employees, which drives strong cash collections across the group.

The group usually has the right to terminate any of the licence agreements with three months’ notice.

There is also a big opportunity for cross-referrals from the DSW network, helped by a service line incentive scheme, due to the broad range of specialist expertise offered by the licensee businesses, there is a significant opportunity for the licensees to refer work to one another in return for a referral fee.

The group’s network of professionals provides expert advice across a whole range of service lines, working with their clients to deliver partner-led bespoke solutions – including Corporate Finance, Transaction Services, Business Recovery, Debt Advisory, Tax Advisory, Equity Finance, Venture Capital, Business Planning, Asset Based Lending Risk Management, Fractional Support, and Wealth Planning amongst others.

The Latest Trading Update

Following the transformative, earnings-enhancing acquisition of DR Solicitors and a significant upgrade to FY25 guidance, resulting from supernormal levels of 'Beat the Budget' M&A activity, the group guided that its FY25 revenue and Adjusted EBITDA will be ahead of current market forecasts.

For the last year Network Revenue is expected to have increased by 61% to a record £25.8m (£16.0m), while Adjusted EBITDA, which is also ahead of forecasts, is expected to almost triple to £1.76m (£0.6m).

The company noted that the Average Revenue per fee earner in the Year was £214k (£153k).

The group’s balance sheet, at 31st March 2025 was healthy, with cash balances of £2.7m (£2.3m) and net debt of only £0.3m (£2.6m net cash), following the acquisition of DR Solicitors and the drawdown of a new £3.0m RCF to part fund the deal.

Management Comment

Appointed on 1st April, new CEO Shru Morris stated that:

"It is an honour to lead this business and a pleasure that my first announcement as CEO is such a positive one.

We have a great team and I would like to thank everyone in the DSW Network for their individual contributions to an outstanding Group performance in FY25, and for their hard work. 

DR Solicitors, our newly acquired legal platform business, also performed well in its first five months with the Group.

I thank everyone for their contribution to our FY25 performance.  

The DR platform is highly scalable, creating a wealth of opportunities for the Group. 

Our intention is to expand into new legal specialisms, and we are actively exploring a number of exciting options for the business.

The pool of candidates working through consultancy models is vast and growing, and it remains our intention to focus on accelerating the growth of this business, building, over time, a substantial platform of diversified, niche legal services. 

The global economic disruption may create a more challenging M&A market in the year ahead, but we are committed to turning those challenges into opportunities in recruitment, which slowed in FY25 due to the abnormally high activity levels.

Our reliance on M&A revenues, however, is much reduced by the addition of DR Solicitors with its more predictable revenues, and we have a more balanced business as we enter FY26.

We shall continue to pursue our strategic goals to diversify, strengthen and grow the business in the year ahead and to maximise on the opportunities presented to us."

The Equity

There are 25,131,108 shares in issue.

The larger holders include James Dow, Dir (16.48%), Mark Watts (11.9%), Philip Price (5.95%), Jonathan Schofield (4.91%), Andrew Dodd (4.60%), Canaccord Genuity Wealth (3.22%), Susannah Dow (3.09%), Craig Richardson (2.98%), and Adam Dow (2.98%).

Broker’s View

After the Update, analyst Jamie Murray, at Shore Capital Markets, increased his estimates for the end-March 2025 year, to see revenues more than doubled to £4.9m (£2.4m), with more than trebled adjusted pre-tax profits of £1.6m (£0.5m), lifting earnings from 1.8p to 5.6p per share, easily covering a dividend of 3.0p (2.0p).

For the current year, he sees £7.7m revenue, £2.5m profit, 7.3p earnings and a cautious 3.1p dividend per share.

The 2027 year could see £8.5m revenues, £2.7m profits, 7.7p earnings and a 3.3p per share dividend.

My View

I like this business model and the way it generates its sales and profits – especially its recurring revenues.

Ahead of its Final Results being declared on Wednesday 2nd July, I feel that its shares at just 53p are very appealing, trading on just 9.46 times historic earnings, and on a mere 6.88 times current year price-to-earnings ratio, while offering a 5.9% historic yield, with a 6.2% prospective!

I now set an early Target Price of 66p.

(Profile 27.05.25 @ 53p set a Target Price of 66p)