Progress in H1 pivoted on successful integration of newer parts of the group’s Legal Services division, its growing scale and achievement of key strategic targets. This is driving Fairpoint’s transformation into a focused legal services business with well-defined strategies and visible growth targets.
The lower contribution from Debt Management activities (DM) was expected, but the shares dipped initially on news that conveyancing (8% of legal division turnover) had come in below forecast as the UK housing market paused post the Brexit vote, and mortgage approvals fell to a 15-month low. Legal Services is increasingly well-diversified but conveyancing had a disproportionate impact on earnings, as we discuss later. We have reduced our full year adjusted PBT forecasts by c £1m to reflect this, but even on new forecasts the shares’ rating looks attractive.
The shift to Legal Services continues as DM is wound down and acquisitions bolted on. Group H116 revenue was 24% up y-o-y on the back of acquisitions and c 4% organic growth attributed to marketing initiatives. Fairpoint aims to build a top five consumer legal services business to compete for an estimated £10bn pa of fragmented industry revenues; industry sources put the current No.5 operator at £60m pa turnover.
Legal Services revenue was £21.5m in the first half, 90% up y-o-y post acquisitions; adjusted segment PBT was £3.1m (H115: £1.4m). Margin growth from 13% to 14% was achieved despite conveyancing performance and we see potential for further material progress over the next few years. Income from this division is now welldiversified, balanced across seven discrete revenue streams with distinct cash generation timeframes and margins. Operations have been harmonised under a single brand, with marketing, administration and new business increasingly integrated.
We have factored in a lower than expected contribution from conveyancing in H2 and 2017, pending more clarity on UK residential market trends over the remainder of this year. The group may decide to cut costs in this area; it hasn’t done so yet as specialist expertise would be hard to replace in a hurry. Elsewhere, performance is on track overall. We anticipated the wind-down of debt management and soft IVA volumes. Other than conveyancing, Legal Services revenues are growing, and long term facilities are available to fund organic growth and acquisitions. The interim dividend was held and distributions remains very well covered. On new FY’16 forecasts the yield on the shares is a healthy 6.7%, and the PER just 7.5x.