Gateley builds non-legal consultancy work

Two days prior to the release of its half-year results, Gateley (GTLY) announced that it was acquiring Adamson Jones Holdings for £2.5m on a cash/scrip basis. The patent and trademark specialist is the 11th business acquired by Gateley since it went public in 2015, although there were no borrowings on the books at the end of October, as these deals have been largely self-funded.

The transaction further cements Gateley’s preferred status as a professional services business offering both legal and consultancy expertise, as part of what it terms “a platform strategy”. Group chief executive Rod Waldie believes the strategy not only differentiates Gateley from competitors, but also results in a “more resilient, sticky” business model, while providing enhanced cross-selling opportunities. He maintains that “the diversity of service lines across the lifecycle of clients’ operations on [Gateley’s] property and people platforms is helping to win work from new and existing clients”.

A step up in half-year revenues was driven, at least in part, by strengthening transactional activity within the group’s banking and corporate teams, while complex dispute litigation also made a significant contribution to the top line. The core legal services segment still accounts for the lion’s share of business, although revenue from non-legal consultancy work grew by 33.9 per cent to £8.3m. Management was keen to highlight the fact that growth in this area was largely organic, rather than simply “bought in”. Average fee-earner headcount was stable through the period, but numbers are expected to increase in the remainder of the current financial year.

Despite wider commercial disruption, trading margins were ahead of pre-pandemic levels, while overheads have been held in check. An underlying profit margin of 13.7 per cent is 50 basis points to the good on the first half of FY2019. And it’s possible that margins could find further support from the amalgamation of offices, particularly if management keeps a lid on discretionary overheads. Some of these costs are still at a quarter of pre-pandemic levels, creating an annual saving of £3.6m. Although there was heightened billing activity through the period, increased capital expenditure demands and the payment of returning bonus and corporate tax outflows meant that free cash flow entered negative territory. Nonetheless, the increase in the number of fee-earners could prove doubly significant if the group continues to build its utilisation rate from pre-pandemic levels. 

Consensus data from FactSet point to adjusted earnings of 14.12p a share for FY2022, rising to 15.68p in the following year.

On balance, the forward rating of 16 times forecast earnings is not too demanding, particularly given the yield on offer. Buy. 

Last IC View: Buy, 210p, 21 Jul 2021