Gateley's operating profits tumble but earnings rise

The market did not react well to Gateley’s (GTLY) interim results. It is easy to see why. Adjusted operating profit at the professional services group fell by 15 per cent in the period to £8.6mn, the dividend has plateaued at 3.3p, and the outlook for the rest of the year is hazy at best. 

It is not all doom and gloom, though. Gateley achieved organic revenue growth of 5.1 per cent in the six months to 31 October 2023, and pre-tax profits actually rose on the back of higher interest payments. However, activity levels across the group were subdued and staff utilisation fell from 86 per cent to 83 per cent. Divisions exposed to transactional legal work were hit particularly hard, and management warned that conditions had not improved as expected.

At the same time, personnel costs increased as a percentage of revenue from 61.7 per cent to 63.4 per cent, as Gateley targeted more senior hires. 

Management is reluctant to commit to full-year guidance, saying “the combination of ongoing macro uncertainty, varying activity levels across the group and the natural weighting towards the final months of the financial year make the group's full-year outturn more difficult than usual to forecast”. It did say, however, that trading should be “broadly in line with market consensus”. 

This is a difficult one to call. Counter-cyclical services are clearly protecting Gateley from the worst of the economic turbulence, and its forward price/earnings ratio is 20 per cent below its five-year average at 9.7. The uncertainty is unsettling though. Downgrade to hold. 

Last IC View: Buy, 154p, 6 Sep 2023