NAHL Group Maiden interims show strong profit growth Interim results Financial services NAHL s maiden interim results show underlying 26% continuing operating profit growth on a 6% growth in continuing operations revenue (driven by enquiry growth and online lead conversion performance). This results in a significant rise in solicitor income margins following the introduction of the group s new pricing model on 1 April 2013. Management indicates that current trading is strong and the outlook remains positive. Supported by this and the FY14 interim data, we raise our FY14 and FY15 underlying PBT and EPS estimates. Net debt fell to 2.0m aided by high operating profit cash conversion. An interim 5.0p DPS suggests a total FY14 15.0p dividend based on the group s stated dividend policy and hence an attractive 7.8% yield. Year end Revenue ( m) PBT* ( m) EPS* (p) 12/12 39.2 4.4 8.0 0.0 24.1 N/A 12/13 39.7 6.2 10.5 0.0 18.3 N/A 12/14e 43.5 12.1 22.2 15.0 8.7 7.8 12/15e 46.4 13.5 24.9 16.8 7.7 8.7 Note: *PBT and EPS (diluted) are normalised, excluding intangible amortisation, exceptional items and share-based payments, and exclude discontinued activities and products. Significant rise in margins in H114 DPS (p) P/E (x) Yield (%) Following the introduction of the group s new pricing model on 1 April 2013, prompted by the UK s Legal Aid, Sentencing and Punishment of Offenders Act 2012 (LASPO) coming into effect, the group s solicitor income gross margin has risen significantly to 35.9% from 31.3% in H113, while this segment s operating margin rose similarly to 21.8%. The product segment operating margin rose to 99.0% from 96.0%. With continued firm control over admin and other expenses and over the mix of enquiries passed to panel law firms (PLFs), the group s operating margin from continuing businesses increased to 27.4% (H113: 23.1%). FY14e and FY15e PBT and EPS estimates raised Supported by management s positive outlook and FY14 interims, we raise FY14e gross margin by 0.15m. However, we have trimmed revenue growth in FY15e to 6.7%, which decreases our revenue estimate by 1.0m to 46.4m. Based on current year performance and next year s estimated increase in revenues, we expect gross and operating margins to further increase in H214e and in FY15e. We therefore increase underlying diluted EPS for FY14e to 22.2p (from 21.3p) and for FY15e to 24.9p (from 23.9p). Valuation: Considerable potential upside remains These results provide comfort that the group s business model is solid. Provided NAHL continues to source quality Enquiries for its PLFs and assist them to achieve higher conversion rates, we believe that management should be able to increase EPS and dividends in excess of 10% pa in the medium term. On this basis, the current valuation leaves considerable upside for the share price. 23 September 2014 Price 192.5p Market cap 79m Net debt ( m) at June 2014 2.0 Shares in issue 41.2m Free float 42% Code Primary exchange Secondary exchange Share price performance NAH AIM N/A % 1m 3m 12m Abs (4.2) (5.2) N/A Rel (local) N/A N/A N/A 52-week high/low 209.00p 190.00p Business description NAHL Group is a leading UK consumer marketing business in the UK personal injury market. The group generates consumer leads through direct response marketing. After internally filtering these leads, quality lead claimants (known as Enquiries ) are directly connected to a panel law firm (PLF). In addition, the group provides selected law process products to law firms. It is a key sensitivity that there is no adverse change in UK regulation related to outsourcing of marketing leads by PLFs. Next events Preliminary results April 2015 AGM June 2015 Analysts Martin Lister +44 (0)20 3077 5700 Fiona Orford-Williams +44 (0)20 3077 5739 consumer@edisongroup.com Edison profile page NAHL Group is a research client of Edison Investment Research Limited
Investment summary: Strong profit growth in H114 Company description: Leading UK PI lead generator NAHL is a leading UK consumer marketing business focused on the UK personal injury (PI) market, advertising through its core brand, National Accident Helpline. Established in 1993, the group s business has become the UK s largest outsourced marketing services provider to the personal injury market, which generates c 3bn in fees generated mainly by law firms. The group s core business model is based on enquiry origination through direct response marketing, connecting claimants who have been injured in non-fault accidents with specialist panel law firms (PLFs). The National Accident Helpline brand has been developed through more than 200m of marketing costs, of which 23m was spent in FY13 and 12.5m in H114. The group s Underdog character, launched in 2010, has helped promote the brand, which is one of the most recognised, most trusted and most searched in the UK according to independent research sources. The group has built five panels of rigorously selected law firms, which pay for NAHL s marketing and overhead expenses on a cost plus variable margin model, based on a predictive enquiry origination formula for the PLF s individual geographic area and specialisation. In addition, NAHL receives commission from the sale of third-party products to the PLFs. The group s brand media spend, marketing know-how and PLF relationships have created significant competitive barriers to entry. Valuation: Considerable potential upside remains As NAHL has no directly comparable quoted competitors, our proxy comparators include selected B2C outsourcers, insurance business processing companies and legal services companies. Versus these proxies, NAHL s valuation on our estimates is second lowest for EV/EBITDA, the only one with a single-digit P/E, and has the highest yield. Provided NAHL continues to source quality Enquiries for its PLFs, and enables them to achieve higher conversion rates, we believe that management should be able to increase EPS and dividends in excess of 10% pa in the medium term. On this basis, the current valuation leaves considerable upside for the share price. Financials: Net cash positive by FY14e year-end The group has historically achieved strong positive cash flow and this has continued in H114. Net debt at June 2014 stood at 2.0m, down from 4.7m at December 2013 and 5.4m at June 2013. Management expects that the group will be net cash positive by FY14 year-end, and this is reflected in our financial summary table (Exhibit 3). By FY15 year-end, we estimate that net cash will stand at 4.9m. The high adjusted operating profit cash conversion (H114: 94.4%) provides support for the group s stated policy to pay dividends of c 66% of retained profits for each financial year. Sensitivities The major sensitivities for the group include: any significant change(s) in the regulation and laws relating to the PI market; the manner in which UK law firms source PI enquiries; the effectiveness of the group s TV and online marketing strategy to generate new leads; its sole exposure to the competitive UK PI litigation market; the standing of the group s reputation and brand; and the stability/security of the group s information systems. A material change to any of these has the potential to surprise on either the upside or the downside. In addition, the expiry of shareholder post-ipo lock-ins is a potential stock overhang. NAHL Group 23 September 2014 2
Interim results for the six months to 30 June 2014 We believe NAHL is well placed to take advantage of market consolidation following the legislative changes implemented in 2013, which have seen a 41% reduction in the number of regulated claims management companies in the year to 31 March 2014. In addition, NAHL s strategy of focusing on large and efficient PLFs continues and management believes that this has aided the strong trading performance in H114. The group has maintained its advertising budget, with new advertisements rolled out on national TV in H114 using the group s Underdog character. In its solicitor income segment, NAHL focuses on the higher-growth non-road traffic accident (non- RTA) and the medical negligence (Med-Neg) UK personal injury markets. These markets produced c 75% of enquiries generated by NAHL for its PLFs compared with 72% in FY13. Successful results in these markets usually result in higher-value claims than road traffic (RTA) cases and are more valued by lawyers as they are more complex and therefore generate higher fees. Group enquiries increased by 10.6% compared with H113, with similar growth in the higher value non-rta and Med- Neg sectors. H114 normalised pre-tax profit rose 73% to 5.95m (H113: 3.44m) reflecting the strong operating performance and significantly reduced interest payable following the repayment and settlement of existing loans in FY13. Diluted underlying EPS rose at a higher rate 87.9% to 11.0p (H113: 5.86p) due to a lower tax-rate. Revenue and margin analysis Exhibit 1 summarises the group s revenue and margin results for the past three half-years, plus our estimates for H214, FY14 and FY15. Following the introduction of the group s new pricing model on 1 April 2013, prompted by LASPO coming into effect, the group s solicitor income gross margin has risen significantly to 35.9% from 31.3% in H113, while this segment s operating margin rose similarly to 21.8%. In its product segment, revenue rose 6% and the group continues to experience very high operating margin, which increased to 99.0% from 96.0% in H113. The group has ongoing trials of a number of additional products under consideration including an enhanced medical negligence screening service. Management says that the initial results of these trials have proved encouraging. With continued firm control over admin and other expenses and over the mix of enquiries passed to PLFs, the group s operating margin from continuing businesses increased to 27.4% (H113: 23.1%) and we estimate a further rise to 28.2% in H214 and 29.1% in FY15. Exhibit 1: Segmental continuing business revenue and margin analysis H113 H213 FY13 H114 H214e FY14e FY15e Segment revenue ( 000) Solicitor income 18,336 16,087 34,423 19,425 18,800 38,225 40,700 Products 2,513 2,781 5,294 2,665 2,610 5,275 5,700 Segment gross margin % Solicitor income 31.3 34.7 32.9 35.9 39.4 37.6 38.3 Products 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Segment operating margin % Solicitor income 17.2 15.1 16.2 21.8 23.8 22.8 23.5 Products 96.0 102.2 99.3 99.0 99.1 99.1 99.1 Group operating margin % * 23.1 26.5 24.7 27.4 29.0 28.2 29.1 Source: NAHL, Edison Investment Research. Note: *After unallocated central costs. Data exclude discontinued business (PPI Claimline) and product (pre-laspo ATE insurance). NAHL Group 23 September 2014 3
FY14 and FY15 PBT and EPS estimates raised Supported by management s positive outlook and FY14 interim data, we raise FY14e gross profit by 0.15m to 19.65m. However, we have trimmed revenue growth in FY15e to 6.7%, which decreases our revenue estimate by 1.0m to 46.4m. Based on current year performance and next year s estimated increase in revenues, we expect gross and operating margins to further increase in H214e and in FY15e. We therefore increase underlying diluted EPS for FY14e to 22.2p (from 21.3p) and for FY15e to 24.9p (from 23.9p). While the group continues to evaluate targeted acquisitions to enhance earnings, our estimates do not include anything from such activities. Balance sheet: Net cash expected by FY14e year-end The group has historically achieved strong positive cash flow and this has continued in H114. Net debt at June 2014 stood at 2.0m, down from 4.7m at December 2013 and 5.4m at June 2013. Management expects that the group will be net cash positive by FY14 year-end. This net debt position includes the outstanding pre-laspo After-The-Event (ATE) non-interest bearing liability, which is reducing substantially as related outstanding cases conclude. During H114, this liability fell to 8.9m from 12.1m at FY13 year-end; management expects this to be substantially repaid by FY15 year-end, at which stage we estimate 3.25m will remain outstanding. Valuation: Considerable potential upside remains There are no quoted companies that are directly comparable competitors to NAHL s business. However, there are a number of marketing companies that employ a similar model, such as Moneysupermarket.com and Rightmove, both of which employ outsourcing B2C capabilities. Also included in our comparison table are insurance business processing companies and quoted legal services companies. The span of valuation metrics for this proxy selection shows considerable variation, especially EV/revenue. Versus these selected companies, NAHL s P/E valuation on both our year one and two estimates is the lowest of the peer group and the only one with a single-digit P/E. On our year two estimates it is the second lowest for EV/EBITDA and has the highest yield. Provided NAHL continues to source quality Enquiries for its PLFs, which are the source of the group s revenue, and enables them to achieve higher conversion rates, we believe that management should be able to increase EPS and dividends in excess of 10% pa in the medium term. On this basis, the current valuation leaves considerable upside for the share price. Exhibit 2: Proxy comparison table Ticker Price Mkt cap YE EV/Rev EV/EBITDA P/E P/E Yield p/us$/ac m/us$m/a$m Hist Year 2 Year 2 Year 1 Year 2 Year 2 B2C Moneysupermarket MONY 201.3 1,097 Dec-13 4.3 11.7 17.8 16.9 4.3 Rightmove RMV 2,415.0 2,384 Dec-13 13.1 17.4 25.7 22.5 1.5 Insurance business processing Redde REDD 73.0 205 Jun-14 0.8 7.3 11.1 10.6 8.2 Serco SRP 285.9 1,570 Dec-13 0.5 9.6 16.8 16.6 2.1 ExlService* EXLS 25.8 845 Dec-13 1.1 4.8 14.5 13.4 0.0 Innovations group TIG 26.8 323 Sep-13 1.0 6.1 15.9 13.6 1.5 Legal services Murgitroyd MUR 537.5 48 May-14 1.1 9.5 15.9 15.1 2.6 Slater & Gordon** SGH 616.0 1,266 Jun-14 2.4 9.9 16.2 14.4 1.6 Shine Corporation** SHJ 270.0 465 Jun-14 3.0 12.0 15.9 14.2 1.5 Average 3.0 9.8 16.6 15.2 2.6 NAHL NAH 192.5 79 Dec-13 1.6 5.4 8.7 7.7 8.7 Source: Thomson Reuters, Edison Investment Research. Note: *US. **Australian. Prices as at close on 19 September 2014. NAHL Group 23 September 2014 4
Exhibit 3: Financial summary Year end December 000s 2011 2012 2013 2014e 2015e IFRS IFRS IFRS IFRS IFRS PROFIT & LOSS Revenue 34,717 39,159 39,717 43,500 46,400 Cost of Sales (21,964) (23,866) (23,090) (23,850) (25,100) Gross Profit 12,753 15,293 16,627 19,650 21,300 EBITDA 6,183 7,044 10,060 12,525 13,765 Operating Profit (before amort. and except.) 6,026 6,870 9,815 12,275 13,515 Intangible Amortisation 0 0 0 0 0 Exceptionals 0 0 0 (652) 0 Share based payments 0 0 7 (330) (600) Other 0 0 0 0 0 Operating Profit 6,026 6,870 9,815 11,623 13,515 Net Interest (2,580) (2,430) (3,617) (165) 0 Exceptional financial income 0 0 0 480 0 Profit Before Tax (norm) 3,446 4,440 6,198 12,110 13,515 Profit Before Tax (FRS 3) 3,446 4,440 6,205 11,128 12,915 Tax (957) (1,159) (1,861) (2,525) (2,650) Profit After Tax (norm) 2,489 3,281 4,337 9,476 10,742 Profit After Tax (FRS 3) 2,489 3,281 4,344 8,603 10,265 Average Number of Shares Outstanding (m) 41.2 41.2 41.2 41.2 41.2 EPS - normalised (p) 6.0 8.0 10.5 23.0 26.1 EPS - normalised and fully diluted (p) 6.0 8.0 10.5 22.2 24.9 EPS - (IFRS) (p) 6.0 8.0 10.6 20.9 24.9 Dividend per share (p) 0.0 0.0 0.0 15.0 16.8 Gross Margin (%) 36.7 39.1 41.9 45.2 45.9 EBITDA Margin (%) 17.8 18.0 25.3 28.8 29.7 Operating Margin (before GW and except.) (%) 17.4 17.5 24.7 28.2 29.1 BALANCE SHEET Fixed Assets 46,521 46,746 40,329 40,329 40,329 Intangible Assets 46,050 46,050 39,897 39,897 39,897 Tangible Assets 429 616 371 371 371 Investments 42 80 61 61 61 Current Assets 26,084 40,740 20,555 10,248 11,906 Debtors 5,724 6,275 3,168 3,500 3,725 Cash 20,360 34,465 14,249 6,748 8,181 Other 0 0 3,138 0 0 Current Liabilities (23,984) (29,991) (30,663) (15,607) (12,819) Creditors and other short term liabilities (10,248) (12,875) (11,788) (9,107) (9,569) Short term borrowings (13,736) (17,116) (18,875) (6,500) (3,250) Long Term Liabilities (37,080) (36,795) (70) 0 0 Long term borrowings (31,908) (31,368) (70) 0 0 Other long term liabilities (5,172) (5,427) 0 0 0 Net Assets 11,541 20,700 30,151 34,970 39,416 CASH FLOW Operating Cash Flow 5,304 10,007 10,416 10,922 13,940 Net Interest (2,675) (2,418) (2,718) (165) 0 Tax (3,419) (3,873) (3,133) (4,370) (2,588) Capex (258) (321) (177) (250) (250) Acquisitions/disposals 0 0 0 0 0 Financing 0 0 0 864 0 Dividends 0 0 0 (2,058) (6,419) Net Cash Flow (1,048) 3,395 4,388 4,944 4,684 Opening net debt/(cash) 31,205 25,284 14,019 4,696 (248) HP finance leases initiated 0 0 0 0 0 Discontinued/demerged 6,969 7,870 4,935 0 0 Closing net debt/(cash) 25,284 14,019 4,696 (248) (4,931) Source: Company data, Edison Investment Research. Note: P&L and cash flow data exclude the impact of discontinued product and business, except where identified. Balance sheet data are as reported and retain elements of these discontinued items. NAHL Group 23 September 2014 5
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Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0)69 78 8076 960 NAHL Schumannstrasse Group 34b 23 September 280 High 2014 Holborn 245 Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St 6 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10167, New York US Sydney +61 (0)2 9258 1161 88 Phillip St, Sydney NSW 2000, Australia Wellington +64 (0)48 948 555 Wellington 6011 New Zealand