Driver Group (DRV) – Wheels Firmly in Motion
I have been aware of Driver Group for many years but it had suffered from a slightly patchy track record and it was only after a placing and change of management in early 2017 that I became interested in investing, particularly with the valuation at that time near historic lows of circa 40p (the stock had actually traded sub-15p in 2011).
In May 2017, N+1 Singer released a useful broker note to accompany a recent ‘Listed Law Conference’ attended by both Driver Group, Gateley (GTLY) and Burford Capital (BUR), the note included a link to a very comprehensive presentation by Driver Group COO Mark Wheeler which is well worth a watch to get a good overview of the business and perhaps quash some pre-conceptions.
Using my Qualitative checklist at that time, I noticed that both Ruffer and Livingbridge (whom I respect) were on the register and I was keenly aware that this sector (Support Services / Construction Consultancies) had seen plentiful Merger and Acquisition (M&A) action over the last 10 years.
With turnover at that time forecast for FY 2017 at circa £52m and the business valued by the market at less than £20m, the Price/Sales ratio was just 0.35 compared to circa 0.75 as a sector average. My broad analysis had convinced me the risk / reward looked attractive and I anticipated at least doubling my investment over a 2-3 year timeframe – the key factors being:
- An improving market outlook
- Change in Management
- Stronger balance sheet post placing
- M&A potential – specifically as Driver Group had the ability to deliver higher margins as a specialist Project Management / Dispute Resolution Consultant compared to others in its peer group and hence was more attractive to an acquirer.
- My own sector knowledge
- Not as cyclical as more conventional engineering type consultants as claims / disputes often occur near, or at the end, of projects and hence an economic downturn or other negative macro factors would be broadly positive for the Group – at least initially.
I bought my first stock in May 2017 at prices up to 49p.
A series of positive updates from the company followed later into 2017 and through into 2018, during which the share price rose from the 40p placing price to circa 80p as of yesterday. I have added to my shareholding all the way during this re-rating.
Source: Driver Group website.
Today’s trading update for the year to September 2018 states:
“The Board is pleased to report that the Group has continued to perform well during the second half and, as a result, it expects to report underlying PBT* for the financial year comfortably ahead of current market expectations at approximately £3.8m.“. Can’t argue with that.
Utilisation rates (basically the percentage of time staff spend doing billable work) are up and its UK, Middle East and Far East offices were all noted as performing well.
With net cash now standing at £6.9m (17% of mcap), revenues forecast to rise to £64m by YE 2019 and a quasi-counter-cyclical (is that a term?) business model, I maintain a minimum short term valuation of circa 100p with a more medium term valuation of 13p. I note the share price is up 10% as I write, still leaving plenty to go for.
Investors will hopefully see an updated note from house Broker N+1 Singer at some point today.
At the time of publication, the author holds a long position in DRV.