LON:NAH | Stock Pitch - NAH (300%-500% Upside)

11th Oct '21 by MassimoJ

20 comments 1838 reads

Current share price - 43p

Break up value - c.£1.50/share

FY23 valuation - £2+/share

Overview

NAHL Group plc (LON:NAH) is listed on the AIM market in the UK. It is the holding company for a group of business that operate in (or adjacent to) the consumer legal services market in the UK. Following a streamlining during FY2020, the group now consists of two divisions:

Consumer Legal Services (CLS) – this division contains:
1. a personal injury (PI) focused claims management company (National Accident Helpline), which generates enquiries from people who have suffered injuries and believe they may have a claim;
2. a wholly owned law firm, which processes claims for claimants from initiation to settlement (National Accident Law);
3. two law firms that are joint ventures between NAH and in each case an independent law firm. These were established to test the concept of internally processing enquiries. They are responsible for the large Minority Interest Payments that appear on the P&L; and
4. Searches UK – a provider of the requisite conveyancing searches that form part of the legal completion process in UK property transactions.
Critical Care – this division consists of:
1. Expert witness provision services, which assists claimants in finding expert witnesses to support their claims for very serious injuries (£100k+ in damages, more often £500k+); and
2. Case management and rehabilitation services, which help those who have suffered catastrophic injuries assess their future and present needs and plan for those needs being met in the future.

Except for Searches UK, each of these businesses is non-cyclical and due to the UK’s statutory PI damages framework, the legal services businesses’ earning power is not diminished in higher inflation environments.

Sentiment around the group is very low at the moment, following the reform of whiplash claims in the Civil Liability Act coming into force on 31 May 2021, which limited damages for whiplash to £240. However, I believe that sentiment is misplaced, as NAH do not actually generate many RTA enquiries, and those they do generate are now being processed in house. For the purposes of the below, I have omitted RTA claims revenue and profits, as the model is untested still.

NAH is currently trading at a market capitalisation of c.£20m and carries c.£14m of net debt, giving a current EV of £34m. This report will demonstrate:

that the current break-up value of the group exceeds £70m (£1.51/share) using conservative assumptions; and
the group is highly likely…

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MassimoJ

11th Oct '21

Thanks for reading - I'd be grateful for any feedback.

Cairo

I dont know and havent checked but does the figure of £1200 per claim still hold true for PI claims post 31 May 2021? On this date a new tariff for whiplash injuries came into force. And legal costs were unavailable for recovery in these types of claim. Eg the minimum amount for whiplash under the tariff is £240. So thats £240 to be split somehow between referrer/cmc, solicitors and the injured party.

You're absolutely right re RTA claims, but NAH don't process many RTA claims, so I've tried to engineer an average value per claim that takes into account the RTA reforms from the post 31 May 2021 enquiries placed

NAH are also processing all RTA claims themselves now, but I've excluded from the above work, as it is still in very early stage and they don't yet know how profitable it will be. The £6.9m of profits in the WIP referred to above is all non-RTA.

I've amended to address this. Thanks again for the comment!

Bristolian

Hi there MassimoJack.

A very interesting write up of NAHL however I do have a few points to Make:

* how many of the 4268 ongoing claims are RTA PI claims? Suggestion in the half year 2022 presentation is that this figure is 1500 , which if true is 35% which a sizeable Percentage.

* They plan to expand into more complex PI claims however there is a lot of competition for this type of work already ie slater and Gordon, Irwin Mitchell, InjuryLawyers4U as all law firms are thinking the same thing.

* Finally in my experience WIP is nearly always overstated, having to be written off for one reason or another or unbilled.

Of course the above are just my musings but I look forward to hearing your comments.

Many thanks

Hi Bristolian

Thanks very much for the comment!

- Certainly the RTA claims will be a large percentage of the total claims in National Accident Law, as processing RTA now is a high volume - low margin business. I would actually expect them to make up the vast majority of claims by number, However, I do not think they will be significant driver of profitability and don't think that RTA makes up any of the £4.6m of unrealised profits in NAL as at 30 June 2021, given it is only one month after the reforms came into force.

- This is true, but National Accident Helpline have a strong brand and very good natural search performance, so I would expect them to continue to compete well for enquiries, and I don't think may PI claimants shop around much. For most, it's the first time (and only time) that they will claim, so hopefully many will accept the internal referral to NAL.

- My experience as a lawyer is also that WIP is overstated until it's billed! However, I think NAH's accounting policies differ to those in Partner-led law practices, and the temptation to build up WIP and then write off at billing is much lower. The types of claims being processed here are fairly simple to triage and NAH have a lot of experience of doing that, so revenue and profit expectations for NAL should be more predictable than those in private practice law.

Thanks again

Massimo

JohnEustace

Massimo,

Is there any catalyst to realise the valuation you see? Is there any plan to break up the business or will it require an activist investor or takeover? Or do investors just have to wait until 2023 for it to be obvious to the market?

I would be more encouraged to buy and wait if NAHL paid a dividend but you don't mention any prospects there.

Would we do better to buy a competitor like Frenkel Topping who seem to have a secure niche at the moment?

John
I can’t see an obvious catalyst at this time, except for more visibility over future earnings as we move through the next couple of management reports.

The critical care business does seem like a bit of a sitting duck, given it’s obviously worth more than twice the market cap, but the only bid for that so far was from Frenkel and they didn’t have the cash, so had to attempt an all share merger, which was too messy to work out.

Re dividends, the business is using all the cash generated to build up the book of WIP at the moment. But when dividends do return in 2023/4, I would expect them to be at 7p or 8p.

BrileyLoucan

12th Oct '21

Excellent write up and great to see some actual figures to come up with a valuation. I think the market is going to be skeptical that it will reach these figures and it is sustainable so may be a while to get to this valuation but it feels like there is a big margin of safety. I think James is a good CEO and is doing the right things though time will tell.

Currently my second largest holding and would add more as I rotate into value and non-correlated investments.

davisj99

Thanks for a well argued case for NAHL - your legal pedigree shows through in the clarity of your language.

I have held NAHL since mid-2018. At the time I thought it was a well run company with a strong brand that had a well thought out strategy for responding to the government's PI reforms. I have held on grimly for the last couple of years because I think the company has been unlucky that Covid-19 coincided with the development of its ABS model. Of late, I had been thinking of exiting becasue I have significant additional exposure to legal services through Anexo and Burford.

However, your sales pitch has given me pause for thought. I wonder whether you would comment on the following:

1. JohnEustace asked whether there is a catalyst to bring about a re-rating. In the same vein, I am concerned that NAHL may suffer from negative sentiment because they are seen as 'ambulance chasers' - I think I recall Paul Scott commented that he would not touch it for that very reason.

2. Is there not a risk that they may fall out with their LLP partners as they allocate more PI claims to NAL. There must be a temptation to 'cherry pick' the better cases. And, in the long run, as the ABS model matures NAHL will have lest need of its partners to fund cash-flow.

3. With their pedigree as a CMC NAHL are probably the strongest PI management outfit. But they do have a chequered history when stepping outside their comfort zone - I'm thinking particularly of the Fitzalan acquisition and the initial ABS joint venture. On the other hand, the Bush acquisition has been successful.

4. The company acknowledged that case volumes were declining before 'lockdown'. Is there not a risk that post Covid-19 working practices may intensify this trend?

5. The value of WIP is arguably the key accounting number. I take your point that NAHL probably have a better handle on WIP than the PI lawyers, but there are two issues that worry me. First, from the point of view of an equity investment, the WIP asset could lead to 'lumpy' returns (although not in the same league, see Burford and to a lesser extent Anexo). And second, if the insurance counterparties see NAHL's increasing reliance on realising the assets tied up in WIP, might they not be tempted to apply leverage to look for settlement 'discounts'?

Sorry Massimo, I have one further isssue.

Do you have any knowledge of whether the Joint venture LLPs have a bearing on the elgibility of NAHL shares for BPR?

13th Oct '21

Hi Davisj99

Thanks very much for the comment and the excellent questions.

1. Maybe there is something in that, but actually NAHL are pretty good when it comes to their conduct compared to other CMCs (as I'm sure you know). If I am right about the future cashflows, I'm sure sentiment will improve. After all, prior to the PI reforms being announced, NAHL was able to maintain a reasonable rating.

2. Certainly the JVs have moved further down the priority list, but my understanding is that NAH have always been honest about that with the JV partners, and the JVs have been fairly lucrative for those partners, so hopefully there is no bad blood there. The JVs were always pitched as learning opportunities and to test the ability of NAHL to convert enquiries into internally processed cases. In that way, they have been valuable, but they are not lucrative enough for NAH for them to continue to form a major part of the mix.

3. Yes, you're absolutely right. I think James Salaris really understands this, and has no interest in Empire building. I would expect the business to continue to consist of the two existing divisions, and when the time is right, for them to push ahead with the disposal of the residential property business. I would also expect them to receive a bid for the critical care business at some point, but they are fairly firm that they will not look to sell that themselves, as the cash generated by critical care can be invested in the PI business to keep the overall group slightly cash generative during the WIP build in NAL.

4. This is a very valid point. My view (from friends in insurance) is that over time, non-RTA claim volumes will recover to close to pre-pandemic levels, but it may take some time. The RTA market has structurally changed post-reforms, so claim numbers there are unlikely to recover. One thing to note however, is that the numbers in my write-up around the build of WIP in NAL, and to some extent the case volumes in critical care, are all based on the last 12-18 months of enquiry volume, so there is a margin of safety built in.

5. The difference between something like Burford or Litigation Capital Management (LON:LIT) (I hold), is that even in the non-RTA book of WIP, the volume of cases means that the settlement arc should be fairly smooth, meaning that revenue and profits are not as lumpy as in a book of WIP which contains fewer, but larger, cases. Regarding the prospect of NAH being squeezed for discounts; you might be right, but I don't think NAH would be in a different position than any other PI focused laws firm there. In fact, NAH is likely to be better capitalised and able to resist that pressure than law firms that are capitalised as partnerships.

6. I'm afraid I don't know the answer to that.

Thanks

A comment on your valuation. Taking your break up numbers as reasonable you would need to adjust for debt held to get to a debt-free/cash-free basis. Therefore value would be £27m + £43m - £14m to give £56m. Still nearly 200% upside on current market cap.

Hi Briley - thanks for that. I forgot to include that I was offsetting net debt with net working capital, but you're right that even then, some deduction should be made. The numbers weren't intended to be specific values. They were more to demonstrate that even using really conservative assumptions, Nahl (LON:NAH) is very cheap at the moment.

Hi Briley

I forgot to mention in the post that I was offsetting net debt with net working capital, but you're right that some adjustment should be made to get to a debt-free/cash-free valuation.

Bully15

25th Oct '21

Hi Massimo, thanks for the post.

It's my understanding that normalised enquiries numbers are closer to 55k per annum into NAHL, over the next 12-24 months it's hoped that the business will return to those numbers again.

the company recently stated that their plan is to place 50% of enquiries into their wholly owned law firm, with an equal split of RTA and the more profitable non RTA (which as you mention makes up the majority of their enquiries, about 50% as I understand).

by that point in 2023 /2024 they should look to see say 25,000+ enquiries placed into NAL, which I would estimate around 45%-50% will then be moved to an active claim process (this is based on numbers released in their 2019 interim report which outlined the conversion rate from placing enquiries into their JV law firms to starting the claims process - "33,650 enquiries had been put in to the JVs up to Aug 19, 4,889 had won and 11,216 were ongoing").

Taking 45% as a rough guide, 11,250 of those placed into NAL will enter the claims process (although not all will be successful).

Revenue from successful claims comes from 2 stages. firstly insurer revenue which is (roughly £500 for an RTA and £900 for an non RTA - based on here https://www.justice.gov.uk/courts/procedure-rules/civil/rules/part45-fixed-costs#45.29C ). Secondly NAL charges the client up to 35% max of settlement money which includes VAT and ATE insurance.

Insurer revenue based on a 50/50 split between RTA and non RTA could work out to around £7.8m. whilst revenue from clients could work out to around £13m. Ive based those numbers on average damages received for RTA and non RTA cases, taking a 30% cut on the damages received (numbers based on data from this website https://www.claimsportal.org.u... )

Overall this could mean that NAL could be turning over c£21m + revenue, based on previous guidance (again in the 2019 interim report - https://www.nahlgroupplc.co.uk...) the company is targeting an operating profit from the NAL business of 35%-45%. Taking a conservative assumption of 30% operating margin then the NAL business should be making c£6m+ operating profit per year on going.

Add the other business units and overall there could be around £13m in operating profit 2023/2024 or £10m-£11m after tax.

not sure of your thoughts on those assumptions?

26th Oct '21

Hi Bully15 - thanks for the comment. Those assumptions look sensible to me, and I think actually accord with management's thinking medium-long term. My much more conservative numbers were really to show that the group is significantly undervalued even if enquiries never return to pre-pandemic levels. I also thought that noting a 800%-900% upside might be a bit rich to be taken seriously...!

12th Nov '21

Thanks for the feedback, good to hear my assumptions aren't completely bonkers.

One of the negative factors I see is a material lack of insider ownership with the management and board of directors at NAHL (I hold). It is interesting to me that the company has taken this path of restructuring the business the way it has, given that it has involved forgoing current profits and revenue (and hence bonus' etc..) for several years down the line. I wouldn't have expected to see such a capacity to suffer in the short term from a management team which lacks any real major shareholder ownership. Russell Atkinson was the largest stakeholder as far as I can see with just over 1% till he left to join call Bryan a competitor. I would be keen to see some insider buying over the next year to show a strong conviction in the business (it's low valuation) and their plan from the senior management. As well as a more detailed share award scheme to further increase the potential for insider ownership and further alignment with shareholder interests.

I'm also interested in what the company decides to do once they ramp up NAL to handle 50% of all enquiries. Does the business just plateau or does it grow? There would be potentially an additional 25% of RTA enquiries which could be placed into NAL for increased profits and growth. I would imagine there would be pressure to take that market share if it's sitting there.

1st Apr '22

Following up on this, in light of the Allenby note released recently what are your thoughts on their forecasts regarding revenue and profit within the personal injury business? And does it change any of your assumptions above?

Stock pitch - NAH (300%-500% upside)

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MassimoJ

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