The term “Steady Eddie” isn’t always a compliment. It involves laborious skill; irrelevant reliability. When it comes to investments, however, sometimes that’s just the thing.
- Cross-sell opportunities
In many ways it is unfair to throw Gateley (GTLY) in this role at all. In 2015, it became the first UK law firm to list its shares on the London Stock Exchange, breaking with the traditional limited liability company model. Since then, it has been a remarkably solid source of growth. Revenues have grown steadily – even during the pandemic – and profits have proven almost as resilient.
Other measures are also solid. Gateley’s return on capital employed has not fallen below 20% since its IPO, and dividends have increased every year until Covid hit and cash-saving measures were introduced. After a brief hiatus, dividends have been restored and for the year just ended will exceed 2018-19 levels.
The momentum is now building. In June, management announced that trades for the year ending April 30, 2022 would be ahead of the City’s forecast. Revenue is expected to be at least £137m, 13% higher than last year, while underlying pre-tax profit is expected to be £21.5m, 11% higher than in the previous period.
Gateley’s business model consists of four “platforms”: business services, business operations, people matters and property matters. At the height of the pandemic, the performance of these divisions has often been discordant. Government support has dampened traditional restructuring and turnaround activities, for example, by hitting business services. In contrast, corporate transactions proved to be “relentless” in 2021 and the real estate department also worked hard.
Things have calmed down a bit since then. Analysts at brokerage Liberum expect Gateley’s property section – which accounts for more than 40% of the group’s sales – to increase revenue by 15% this year, with business sales growth also expected to be strong at 18 %. Meanwhile, Gateley’s smaller people platform is experiencing a post-Covid rebound. The only fly in the ointment is business services, which contracted 10% in the past fiscal year after several long-term litigation projects were halted.
In many ways, however, Gateley’s appeal isn’t in the details, but in its larger approach. Since floating, the group has ventured beyond the law and into professional services more generally. Each of its four platforms includes clusters of complementary group services, designed to maximize cross-selling opportunities.
This approach seems to work. According to the group’s June business update, non-legal advice revenue grew 43% in 2021-22, with organic growth of 24%. Organic metrics are important because they show that Gateley is not just buying incremental sales, but generating them internally. It’s not always the case. Member of the Legal Services Group Knights (KGH) is zealous, aspiring several regional practices each year. However, its latest results show organic growth stagnating at just 2%.
Analysts estimate Gateley’s consulting arm will generate 15% of sales in 2022, compared to just 7% in 2018-19. His contribution looks set to get even meatier; in April, Gateley moved more forcefully into the realm of acquisitions, buying surveyor Smithers Purslow for an initial consideration of £12.2 million. Management tapped into a new £30million revolving credit facility to fund the deal, adding that the loan arrangement will support more purchases.
Unlike some legal eagles, however, Gateley generally avoids large amounts of debt – last October he only had to worry about rental debt – and is one of the most powerful cash generators among his peers. cited. The first half of 2021-2022 instead broke this trend, with free cash flow falling from £10.6m to an outflow of £1.9m, as the group paid bonuses and taxes which have been frozen during Covid. However, as the world emerges from the pandemic, normal service is expected to resume.
Margin of thmistake
In the meantime, keep an eye on profit margins. In July, DWF (DWF) said the talent war is one of the “biggest issues” facing the legal industry, and it’s starting to affect corporate accounts. Analysts say Gateley introduced a 12% pay rise in April 2021, after freezing salaries in 2020. 64.1% in 2021. 2022.
So far, the group’s underlying profit margin has remained stable at 13-14%, and management is passing costs on to customers through higher fees. Spending on travel, marketing and office space is also still down. (Operating costs as a percentage of sales fell from 21.6% in 2020 to just 15.1% in 2022.)
There is no doubt that the legal sector is under pressure, however. Gateley is believed to have to offer double-digit pay rises to newly qualified lawyers to stop them going elsewhere, which is having a ripple effect as senior executives also expect a pay rise. Meanwhile, management’s ability to keep marketing, travel, office and entertainment costs down will be strained as in-person events return.
Gateley is in good company as it grapples with these issues – virtually no professional services firm is immune to wage inflation. However, Gateley seems more resilient than most. Research from broker Liberum found the group has particularly low volatility in earnings per share compared to its listed legal peers, suggesting it should do well in a recession.
This research is beginning to materialize in real life. In March, Knights issued a profit warning, saying the Omicron variant of Covid and macroeconomic headwinds had led to staff absences and a loss of business confidence. Its usually strong fourth quarter was particularly slow. DWF also reported an increase in absences in the last four months of its calendar year as staff fell ill and took much-needed vacations. Gateley – on the other hand – improved its market forecast.
Earnings warnings and inflation fears mean law firm stocks haven’t had a comfortable time lately. Gateley is down 16% year-to-date; DWF is down 19%; and Knights is down 68%. Gateley’s rating is therefore slightly below par, at just under 12 times forecast earnings for 2022-23. This compares to a five-year average of 13.1 and an industry average of 14.3.
Investors looking for explosive earnings growth or cutting-edge legal innovation won’t find much to love at Gateley. Litigation funders might have more appeal. However, those looking for stability, resilience and composure in the face of a crisis – all at a good price – should look no further.
|Company details||Last name||Market cap||Price||52 weeks high/low|
|Gateley (Holdings) (GTLY)||£237 million||191p||262p / 173p|
|Size/debt||NAV per share*||Net Cash / Debt(-)||Net debt / Ebitda||Operating cash/EBITDA|
|Evaluation||PE before (+12 months)||JJ (+12 months)||FCF yield (+12 months)||P/Sales|
|Quality/ Growth||EBIT margin||ROCE||CAGR of sales over 5 years||CAGR EPS 5 years|
|Forecast / Momentum||Fwd EPS grth NTM||Fwd EPS grth STM||Mom of 3 months||% change in EPS before over 3 months|
|Year-end April 30||Sales (millions of pounds sterling)||Profit before tax (millions of pounds sterling)||EPS (p)||DPS(p)|
|To change (%)||+8||+8||+2||+3|
|Source: FactSet, adjusted PTP and EPS figures|
|NTM = next 12 months|
|STM = second 12 months (i.e. in a year)|
|*Includes intangibles of £16 million or 13 pence per share|