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Keystone tempting lawyers with home working freedom

It has had a great year but to justify its valuation, it needs to bring in a lot more lawyers.
Keystone tempting lawyers with home working freedom
  • Margins improved
  • Continued to grow its headcount

Usually when companies, or people, are going through a period of change they need lawyers to navigate the way forward. It could be divorces, litigation, M&A, insolvencies or share placements but when things are changing, lawyers are usually involved, and there has been plenty of change this year. This is why Keystone Law (KEYS) has seen its revenue jump by nearly a fifth year on year, though the flexibility of its business model has also been a contributory factor.

Keystone’s pretax margins expanded from 9.0 per cent to 13.7 per cent partly because the firm has been hosting less in-person events and doing less entertainment, arguably an indirect benefit of the pandemic. The second part of the margin story is to do with economies of scale. Keystone has never had much office space because all its lawyers are self-employed and work at home. This means that its initial capital commitments are relatively modest whenever it is expanding the number of lawyers on its books. Indeed, its lowly capital commitments have always been a big part of Keystone’s investment story and this is why it commands a price above the industry average.

To benefit from these economies of scale (and justify its price) it needs to keep growing its headcount. In the first half of the year it had 136 new applicants, up from 108 at the end of 2020. Of those applicants, 28 accepted offers. The continuing rise in Keystone's numbers is because more lawyers have experienced the benefits of homeworking in the last year. Many traditional firms are now asking lawyers to return to the office at least a few days a week and this has encouraged lawyers to look to Keystone to maintain their flexible lifestyles.

Panmure Gordon believes that Keystone will maintain its momentum and has upgraded the FY22 EPS forecast from 17.8p to 20.8p. The FactSet consensus EPS forecast has also been increased by 13 per cent to 19.9p. The share price reacted accordingly with a double-digit increase on results day. Trading at 40 times forward earnings its value is more akin to a tech company than a freelance legal agency. There is better value to be found at other law firms at the moment if you want exposure to the industry. Hold.

Last IC View: Buy, 669, 29 April 2021

KEYSTONE LAW (KEYS)  
ORD PRICE:823pMARKET VALUE:£ 257m
TOUCH:820-840p12-MONTH HIGH:840pLOW: 435p
DIVIDEND YIELD:2.2%PE RATIO:42
NET ASSET VALUE:54pNET CASH:£5.9m
Half-year to 30 JunTurnover (£m)Pre-tax profit (£m)Earnings per share (p)Dividend per share (p)
202024.51.955.003.3
202133.74.3010.84.5
% change+38+121+116+36
Ex-div:23 Sep   
Payment:15 Oct   
*Includes intangible assets of £5.9m, or 19p a share