Expert Witness Demand And Infrastructure Complexity Will Drive Long-Term Opportunity

Catalysts

About Diales Group

Diales Group provides specialist expert witness and advisory services to global construction and infrastructure projects, focusing on quantum, delay, technical and project management disputes.

What are the underlying business or industry changes driving this perspective?

• Global infrastructure and energy transition projects are increasing in scale and complexity, which may drive sustained demand for high value expert witness and advisory work and support continued revenue growth and higher average billing rates.
• The shift toward de-risking and resolving large project disputes outside traditional court processes is expanding the need for independent experts in mediation, arbitration and adjudication, which may underpin higher utilization and improve net margins.
• Ongoing investment in the hub and spoke operating model, Salesforce CRM and real time management dashboards is strengthening operational discipline and pricing power, which could translate into further gross margin expansion and improved operating leverage.
• Strategic hiring in high value niches such as fire engineering and technical disciplines, alongside the proven internal talent development pipeline, positions the group to scale fee earning capacity without materially increasing central overhead, potentially supporting faster earnings growth than headcount growth.
• Portfolio refocusing through exiting structurally weaker geographies, rightsizing APAC and maintaining a debt free balance sheet with disciplined capital returns creates capacity to add bolt-on teams or acquisitions at attractive returns, which may enhance earnings per share and support a re-rating of the stock.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Diales Group's revenue will grow by 2.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 0.5% today to 2.1% in 3 years time.
• Analysts expect earnings to reach £1.0 million (and earnings per share of £0.02) by about December 2028, up from £217.0 thousand today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, down from 48.2x today. This future PE is greater than the current PE for the GB Construction industry at 15.2x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.81%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The exit from the U.S., prior closures in Oman and Kuwait, and the need to rightsize APAC highlight that missteps in geographic strategy or further market exits could cap the firm’s global addressable market and constrain long-term revenue growth.
• The model is heavily dependent on hiring and retaining a relatively small pool of top tier experts, so persistent churn or failure to secure enough new high quality experts in specialist areas such as fire engineering and forensic accounting could limit utilization and billing rates and slow earnings expansion.
• Although current gross and net margins are improving, they remain modest and are exposed to rising overheads from necessary investments in cyber security, IT systems and recruitment, which could compress net margins if revenue growth or pricing power falter.
• The business is highly geared to large construction and infrastructure disputes, so any structural fall in dispute volumes, increased use of in house teams by major contractors or disruptive technologies that reduce demand for external expert testimony could dampen long term revenue and profit growth.
• The capital allocation strategy relies on finding “insanely profitable” bolt on acquisitions at attractive prices, and if suitable targets do not materialize or are overpaid for, excess cash may generate low returns or acquisitions could dilute margins and depress earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of £0.33 for Diales Group based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £46.5 million, earnings will come to £1.0 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 8.8%.
  
• Given the current share price of £0.2, the analyst price target of £0.33 is 38.5% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.