1 UK stock to consider buying for its turnaround potential

We’ve seen tremendous comebacks from a fair few UK stocks this year, including Fresnillo (+238%), Babcock International (+132%), ITM Power (+77%), and Genus (+69%). Respectively, these span a precious metals miner, defence contractor, green energy innovator, and animal genetics firm. These highlight the wide range of opportunities available to investors looking for a stock to buy.

Here, I’ll look at a share that I reckon is capable of staging a turnaround over the next few years.

Knights

Knights Group (LSE:KGH) is an AIM-listed legal and professional services firm that released its annual results today (15 September). While the market responded positively, pushing the share price up 10% to 162p, that still leaves Knights down 65% in five years.

The damage was done in March 2022, when the stock fell off a cliff after a profit warning. As we can see, it has yet to fully recover.

Yet the company continues to expand. In the 12 months to 30 April, revenue increased 8% to £162m, up from £74m in 2020. The group recruited 51 senior fee earners, 28% more than the prior year, while its increasingly diverse service offerings is attracting more clients. 

Underlying EBITDA jumped 11% to £43m, while underlying pre-tax profit rose by the same amount to £28m, with a 40 bps increase in margin to 17.3%. Including acquisition-related costs though, reported pre-tax profit was down 17% to £12.3m.

Encouragingly, management said trading had started well this year, with further profitable growth expected over the medium term. The total dividend was hiked nearly 10% to 3.05p.

CEO David Beech commented: “This has been a year of step changes for the business, with strategic progress and a strengthened leadership team embedding enhanced operational discipline — all underpinning the Group’s platform for future growth.” 

Growing by acquisition

Knights has specialists in all key areas of corporate and commercial law, as well as private wealth services. It focuses on markets outside of London, where it has snapped up multiple firms over the past few years.

In the first half, the company acquired Thursfields Legal, enhancing its presence in the Midlands. In the second half, it bought IBB Law for £30m, its biggest acquisition to date.  

Since the end of April, it has added Birkett Long, expanding its legal and wealth advisory services, and Rix & Kay to boost its presence in Kent and Sussex. Le Gros Solicitors in Cardiff was also purchased.

Of course, acquisitions add risk, especially as the group starts to eye larger deals. In economic downturns, newly acquired firms may underperform. And it’s worth noting that there was no organic growth last year, which was disappointing.

Net debt also rose sharply due to acquisitions, from £35.2m to £64.8m. Still, a net debt-to-EBITDA ratio of 1.6 times doesn’t appear stretched.

Cheap-looking stock

Analysts currently expect full-year revenue to rise 18% to £191m, with a similar increase in adjusted earnings. This puts the stock on a low forward price-to-earnings ratio of 6.2.

At this price, I do see value, especially when there’s a 3% dividend yield on offer too.

The UK legal services market remains extremely fragmented. So Knights should have no shortage of opportunities to continue expanding its regional footprint in the coming years.

Despite risks associated with Knights’ acquisitive model, I think the stock is worth considering as a buy today.

The post 1 UK stock to consider buying for its turnaround potential appeared first on The Motley Fool UK.

More reading

• How much would you need in a Stocks and Shares ISA for a £30k second income?
• How many Tesco shares would it take to earn a £500 annual passive income?
• Here’s 1 interesting under-the-radar UK stock to consider
• Here’s a 5-stock FTSE 100 portfolio to consider to target a £1k monthly passive income
• Are Diageo shares turning into the next British American Tobacco?

Ben McPoland has no position in any of the shares mentioned. The Motley Fool UK has recommended Fresnillo Plc and Itm Power Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

See author's posts