DSW slips into half-year loss due to continued sluggish M&A activity

James Dow

Turnover dropped and a pre-tax loss has been posted by DSW Capital, the Daresbury-based mid-market, challenger professional services licence network, for its interim period ending September 30, 2023.

But it expects prospects to improve in second half trading, it said today.

Shares in the business rose 6.93% in early trading to 54p per share following the news.

Revenues dropped from £1.509m in 2022 to £1.108m this year. A £588,000 2022 pre-tax profit has become a £63,000 pre-tax loss in the latest reporting period.

The business retained cash of £2.8m, down from £4.6m at the same point last year, after the investment of £0.9m in Bridgewood, dividend payment of £0.4m and breakout incentives of £0.2m to new partners.

DSW will pay an interim dividend of 1.25p per share, representing one third of the intended full year dividend (FY23: 3.76p). It said it intends to maintain its progressive dividend policy.

Network revenue was 25.3% lower at £7.3m (H1 23: £9.8m), reflecting subdued M&A activity, while total income from licensees was 30.9% lower at £1.1m (H1 23: £1.6m).

Fee Earners increased to 104 at the period end, compared with 93 last year. Partner numbers increased 20% from 40 to 48. Three new partners have joined the business, since the period end, taking the current total to 51

Tax advisory capabilities, a target for the group, were expanded through supporting DSW Tax Advisory’s acquisition of STS Europe.

And a new geographic location and office in Leicester was added during the period with a corporate finance team joining the network under the Breakout Initiative.

Since the period end, a further geographic location has been added under the Breakout Incentive, which targets existing teams in larger firms, with the launch of a new Corporate Finance business in Cardiff

DSW said while deal volumes have decreased on the prior period, average deal values across Corporate Finance and Financial Due Diligence have increased from £8m to £14m, reflecting the growing strength and profile of the brand.

The group is upbeat about its outlook, saying adjusted pre-tax profit in the fiscal year for 2024 is expected to be between £1.1m to £1.4m – with the higher end achievable subject to certain M&A deals completing before the year end.

It said DSW Network well positioned to benefit from returning M&A activity levels, which continue to recover, while early results of recruitment investment are positive – the increase in partners is expected to drive organic fee earner growth.

The board says it is confident in the group’s growth strategy and continues to invest in the long term future of the Network

Chief executive, James Dow, said: “I am encouraged that our licensees reported more normalised levels of M&A activity in the three months to 31 October 2023, which suggests that we may have passed the low point in the cycle.

“We expect that M&A activity will continue to recover in the second half and that the group is likely to achieve adjusted pre-tax profit between £1.1m to £1.4m in FY24.”

The company reduced its forecast following a trading update earlier this month, dropping expectations from an adjusted pre-tax profit of between £1.4m to £2m, down to the revised level of £1.1m-£1.4m now.

At the same time, DSW warned that it expected a second-successive drop in profits due to the slowdown in the deals market.

In today’s statement, Mr Dow added: “We will continue to seek to grow the business, through diversification with the addition and expansion of new service lines, to improve its resilience and reduce its dependence on corporate finance and due diligence.

“Our results are typically weighted towards the second half of the financial year, due to the recognition of profit share income. This year is no exception. The group will benefit from the contribution from Bridgewood, which joined the Network in July 2023, in the second half, and also from an expected improvement in M&A activity.

“During this favourable time for recruitment, our ongoing investment has delivered three new offices to the Network and expanded our corporate recovery and tax service lines, as well as increasing partner numbers from 40 to 51. Partner numbers are a lead indicator of future organic Fee Earner growth.

“We will continue to invest in the long term profitable growth of the business and the delivery of strong returns for all our stakeholders.”

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