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Investors’ Chronicle: Foresight Capital Management, Knights Group, Loungers

BUY: Foresight Capital Management (FSG)

A diverse fund manager combining private equity with renewables investment has upped its game, writes Julian Hofmann.

Specialist fund managers are one of the few areas of the sector to have ridden out the worst of the downturn in valuations, as well as continuing to attract funds to manage. Foresight, on which we initiate regular coverage, is an asset manager that holds interests in renewable energy investments, as well as an unusual private equity business that bases itself regionally within the UK. That approach looks promising so far, with assets under management (AUM) increasing by 23 per cent to £8.8bn and a big increase in the dividend in these results.

Foresight caters to a broad-spectrum clientele with approximately 70 per cent institutional and investment clients and 30 per cent retail. The business is separated into three separate management areas: infrastructure, private equity and Foresight Capital Management, with infrastructure by far the largest division with AUM of £6.3bn. Most of this is invested in diverse renewable energy assets, both in the UK and other markets such as Australia — where the company completed the AUS$140mn (£79.6mn) acquisition of Infrastructure Capital alongside the results.

As with other managers, it relies on recurring fees and Foresight has 87 per cent of its total revenue recurring annually. It also booked a big increase in performance fees for the year, though these were less material at just over £3mn.

Chair Bernard Fairman said he did not think that inflation would play much of a role beyond the end of this year.

“The money supply has collapsed and if you look at how governments are acting in a procyclical way, there are probably going to be mild recessions everywhere,” he said.

Fairman said the main issue for investors in renewable assets is how yield compression has raised the price of “second-hand” investment assets, which is radically different when compared with the higher interest rate environment that Foresight funds worked with in the early 2000s. However, he added that the company has locked in returns of 6 to 7 per cent in its diverse energy portfolio for the next 20 years.

Foresight is definitely an interesting proposition, particularly as its portfolios tend to have inflation protection built-in. The shares are rated at 15 times broker Numis’s earnings per share forecasts for 2023. That is roughly the same as larger companies in the sector that are doing a lot worse.

HOLD: Knights Group (KGH)

The legal services group has blamed its results on a difficult fourth quarter affected by the pandemic, writes Jemma Slingo.

At the end of March, Knights’ share price plunged by 45 per cent after it issued a profit warning. The effect was felt across the listed legal sector: shares in Keystone slid by 13 per cent, and Gateley also wobbled.

Knights has now published its full-year results, which are in line with the figures set out in its gloomy spring update. Underlying profit before tax has shrunk by 2 per cent to £18.1mn, while its reported profit before tax decreased by 80 per cent to £1.1mn. The discrepancy between adjusted and statutory figures is largely due to “one-off” acquisition costs worth £13.2mn. Given the group’s aggressive acquisition strategy — which involves hoovering up regional law firms on a regular basis — it’s sensible to stick with statutory figures.

Knights attributes its disappointing results to a difficult final quarter, which saw “unusually high levels of employee sickness and disruption caused by the Omicron variant” and a “slight softening in business confidence”. However, it is important to look at the company over a longer timeframe.

Since floating in 2018, Knights’ revenue has more than tripled. However, its pre-tax profits have not followed the same trajectory, peaking at just £5.51mn last year. Its acquisition strategy is clearly not translating into strong profit growth. It has also resulted in a big debt pile; borrowings combined with lease liabilities now add up to almost £80mn, up from £66.7mn this time last year. Rising staff costs could add to the pressure, despite Knights’ confidence that it can offset wage inflation with fee hikes.

Demand for legal services usually proves resilient during economic downturns and — with a forward price/earnings ratio of just 4.7 — Knights is significantly cheaper than listed peers such as Gateley, Keystone and DWF. However, its record is not reassuring.

HOLD: Loungers (LGRS)

New sites are paying off and it looks like there is scope for many more. Non-property net debt is also down, writes Christopher Akers.

Loungers posted record revenue, boosted by its “local” focus as people spend more in their own neighbourhoods. The hospitality firm, which operates under the Lounge and Cosy Club brands, is expanding its estate footprint and taking advantage of a high street decimated by company voluntary arrangements.

Chief executive Nick Collins said that the company is “benefiting from changes brought around from the pandemic” as people spend more time (and cash) in their local areas.

This was borne out by the results. Average customer spend was higher, and a gross margin of 43 per cent was up by 180 basis points from last time around. New tech seems to be working out, with the order at table app taking 40 per cent of total sales at Lounge sites.

Estate growth is likewise encouraging. The company can now boast of more than 200 sites, after opening 27 in the year, and is benefiting from strong property opportunities as high street retail struggles. Management said that hitting 500 sites is a “conservative” target, while Panmure Gordon analysts think there is scope for 700 UK sites. An aggressive approach looks like it is bearing fruit, with new sites posting above-average sales and cash profits.

Peel Hunt analysts said that Loungers has gone through a significant “derating in the hospitality sector even though it has emerged from Covid with the best upgrade record”. The shares are trading at 20 times the house broker’s 2023 financial year earnings forecast, which looks a little chunky, although this is expected to fall to 17 times in 2024. And while prices have not been raised by as much as peers, this is something to watch as inflation rises further and the cost of living crisis intensifies.

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