Listed legal business “de-risked” but profits fall sharply

Divers: Profitable and highly cash generative business

RBG Holdings – the AIM-listed business that owns two law firms – has “de-risked” and begun paying down its debt, while profits have been slashed in the first half of the year.

The group – home to London practices Rosenblatt and Memery Crystal – saw its revenue drop to under £21m in the six months, £6m less than the same period last year (or £4.4m less if gains on litigation assets are excluded).

In July, it sold its litigation funding arm, LionFish, for up to £3.1m and wrote off all of its contingent work, sending the share price to an all-time low. It also stopped dividend payments so as to focus on reducing debt.

Yesterday’s announcement said a reduced deal flow at Convex Capital, the specialist sell-side corporate finance advisory boutique it owns in Manchester, also contributed to the reduction.

This all turned into a loss before tax of £13m, compared to a profit of £4.6m in the first half of 2022 – largely due to the write-off – and an adjusted profit before tax of £400,000, down from £4.6m.

The share price has continued to fall and closed yesterday down 6.5% at 21.5p – a quarter of what it was a year ago.

The new executive management which took over at the start of 2023 following the sacking of previous chief executive Nicola Foulston – is pursuing a strategy of focusing on the core legal services business.

The two law firms employ 174 people, including 120 fee-earners. Five new partners have joined since April, with two more on the way. The average revenue per fee-earner was £406,000 (£363,000 last year), putting it in the top 20.

A reduction in gross margin from 42% to 39% “reflects the diversification of the legal services business into more non-contentious areas of law, following the acquisition of Memery Crystal”.

The stock exchange announcement said: “This is lower margin work but more consistent, which provides a natural hedge to the group’s dispute resolution activities which, while more profitable, are more contingent.”

Dispute resolution accounted for 44% of legal income, corporate for 42% and real estate for 14%.

The two firms now share a practice management system, “allowing them to work seamlessly on the same cases and improving cross selling opportunities”.

Group chief executive Jon Divers said he was pleased with the performance of the law firms. “Their trading, despite the wider economic environment, has highlighted the resilience and counter cyclical nature of the businesses, both of which have over 30 years’ proven trading history. Driving the organic growth of these businesses is at the heart of our plans…

“The decisive action we have taken during the first half, means that the group has been de-risked and simplified, providing greater visibility to investors going forward.

“The ongoing business is profitable and highly cash generative and we are committed to reducing the group’s debt. We have a clear vision, a solid foundation on which to grow, and an absolute commitment to restoring the group’s value.”

Investors also heard that “positive discussions with lenders” were underway regarding the group’s debt facilities, which are due for refinancing next April.

The board said it was confident of meeting full-year expectations, with the second half of the year historically stronger than the first.

Convex only completed one deal in the first six months, with M&A slowing down across the market, but it has a pipeline to 22 deals, of which seven are approaching completion.

In July, Rosenblatt founder Ian Rosenblatt, the group’s largest shareholder and individual revenue generator, joined the board as executive vice-chair.

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