Strategic focus on strong growth
​Fairpoint Group provides a range of retail consumer targeted professional services. The group's core business is a consumer legal operation, supported by legacy IVA services.
The two key messages from yesterday's H1'16 trading update were (a) strong progress by Legal Services, in line with expectations and (b) the decision to pursue an orderly wind-down of the debt management plan services (DMP), prompted by new FCA regulation which increased costs and made that business appear unviable.
This will continue the group's focus on core Legal Services which contributed 75% of H1'16 revenues. That was 20% up y-o-y, but the current run rate is closer to twice last year driven by the acquisition of Colemans completed in August 2015, near fully integrated. This division already represented 100% of medium term growth potential. DMP income pivoted on a steadily shrinking client portfolio, management of which has become more complex and time-consuming, resulting in higher potential churn.
The transition to predominantly legal services is ahead of schedule, but was already well underway. There were no operational synergies between the two operations and no plans to rescale debt solutions. Legal Services reported a positive H1'16 and continues to seek acquisitions to complement its service portfolio.
Legal Services revenues are growing even without new acquisitions, long term facilities are available to fund organic growth and acquisitions, and even after this adjustment the dividend is very well covered. Share price weakness post small claims uncertainty and this latest news puts them on an attractive prospective FY16 PER of 6.5x and 7.1% yield.
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