Gateley's cash generation gives it a chance to grow

Lawyers are a resilient bunch. Despite the pandemic slowing trading in the first half of the year, Gateley (GTLY) bounced back to post a creditable set of year-end results, largely thanks to the performance of its property and corporate groups.

Underlying profit before tax was up 7.1 per cent to £19.3m and the group's strong cash generation allowed it to increase its net cash position (ex-lease liabilities) by £20.5m to £19.6m. The law firm put acquisitions on hold during the pandemic but prudent cash management leaves it in a good position to respond to a probable increase in litigation volumes over the coming year. The focus of any deal-making will be on consultancy businesses, rather than legal services. Last year, consulting made 11.5 per cent of total revenues and the long-term aim is 30 per cent.

Part of the success of the property and corporate practices will have been driven by exceptional tax environment. The stamp duty holiday last year increased demand for residential properties, while the rumours of a capital gains tax increase encouraged clients to bring forward their M&A plans. With these forces fading next year there may be a weakening in demand. However, Gateley can be confident the government will continue to find ways to encourage housing construction given the current under-supply.

Banking and financial services work is also expected to pick up again next year. It was down 4.1 per cent because of a reduced demand for restructuring and insolvency due to the government stimulus - a backdrop shared by corporate restructuring specialist Begbies Traynor (BEG), which released results on the same day as Gateley. It is probable that when stimulus is removed there will be a wave of work.

According to FactSet, Gateley’s forward PE ratio is 15.5, below the sector average of 20. Buy.

Last IC view: Buy, 126p, 30 Sep 2020