DSW Capital counts cost of Truss’s disastrous September Budget

A weak second half will impact Daresbury-based DSW Capital, it said in a market update today, as it bids to recover from former PM Liz Truss’s calamitous September Budget.

The mid-market, challenger professional services licence network and owner of the Dow Schofield Watts brand, said that, following a very strong first half performance, the historically weighted second half to March 31, 2023 is being impacted by the wider macro-economic conditions and uncertainties, which the board believes will result in the group not achieving current market expectations.

The board said the group’s stated strategy is to diversify its service lines, so that it is less dependent on revenue from M&A activity.

However, this remains work in progress, as it seeks to build more counter-cyclical services into the network. Corporate finance and due diligence, however, currently comprise most of its current network activity.

Several deal completions in these categories paused, during the well-reported turmoil following the mini budget in September.

The board had expected activity to normalise, as the political landscape settled and the group saw some recovery in the network’s performance in November’s results. December is traditionally an important month for the group, as the natural month for deal completions ahead of the seasonal holiday break.

Continued deal slippage and caution in the market, however, led to the group’s performance in this important month to be significantly lower than anticipated, as deals were not executed as expected.

Other group service lines continue to perform well in this period and in line with the board’s expectations.

In addition, uncertainty arising from the economic outlook has impacted, and continues to impact, recruitment. No further fee earners have joined the network since the start of October with fee earners remaining at 97.

The group is in active discussions with a number of potential new fee earners and acquisitions, but caution in the wider market is currently impacting progress in this area.

Timing on transactions in the group’s M&A-focused service lines, which comprise 70% of its services, will largely dictate the full year outturn.

The quality of the opportunities pipeline is good but the completion timelines are longer than previously anticipated. There is currently uncertainty as to the speed of the recovery in this sector.

This leads the board to revise its financial guidance for the year ending March 31, 2023, with network activity levels in FY23 expected to be broadly similar to FY22, revenue expected to be between £2.8m and £3.1m (FY22: £3.0m) and EBITDA expected to be between £1.4m and £1.7m (FY22: £2.2m).

At December 31, 2022, the group held cash balances of £4.8m from which it paid a dividend to shareholders of £0.4m on January 11, 2023. There is, therefore, significant capital to deploy, and the board is continuing to evaluate opportunities to grow the business through diversification with the addition and expansion of new service lines.

Chief executive, James Dow, said: “Following a very strong first half of the year, the board is extremely frustrated by this recent confluence of events which has stuttered the previous excellent growth experienced by the group since our flotation.

“Whilst there is now a broad range of possible outcomes for FY23, we have confidence in the robustness of our business model, strength of the balance sheet and the ability of our partners to adapt.”