Keystone Law grows headcount and profits

Keystone Law (KEYS) is one of those professional services companies that have the potential to exist outside the economic cycle – when times are bad people sue, when they are good there are deals for lawyers to ink. The key constraint on its growth over the past 18 months has been the UK’s tight labour market, which affected the law firm’s ability to recruit new talent as it did the pub industry’s search for bar staff. The company’s return to first-half revenue growth – revenue per law principal was up 12 per cent to £104,000 – is also a sign that the hiring blockage that had held back its growth is starting to ease.

For instance, the company engaged 25 new starters, out of 42 offers made during the half – its best total for two years. New lawyers mean the company can take on a greater caseload, and it currently has 415 principals working for it. The extra headcount, plus existing lawyers taking on more available work and price increases, was the main reason that operational gearing helped to turbocharge profits, with pre-tax profits well ahead of equivalent revenue growth at 27 per cent.  

Peel Hunt analysts said in a note that: “Legal rates tend to be resilient over time. On the downside, Keystone does not comment on hours billed or average billing rates, hence an understanding of some of the key performance indicators (KPIs) normal to a legal business is not available to investors.” The broker also reckons that the new lawyer recruitment, currently 12 per cent of the total workforce, needs to improve to 15 per cent to fully offset leavers and maintain numbers. The self-employment status of many solicitors contributes to higher levels of turnover.

Certainly, the company seems to have a spring in its step – a confidence that is reflected in the 12.5p special dividend that was also paid out to shareholders in these results – although even management noted that the second half may see some headwinds for the UK economy. The business model is simple and cash generative and under the right conditions can generate operational gearing, although this is limited by the caseload it can carry. Peel Hunt forecasts earnings per share (EPS) of 24.9p for 2024, giving a price/earnings (PE) ratio of 19. This leaves just enough room for a further re-rating if it can deliver on billings across a wide spread of legal specialists. Buy.

Last IC view: Buy, 465p, 24 Apr 2023