Gateley 'cautiously confident' after sales rise

The legal sector was plagued by fears about recruitment and demand last year, and a profit warning from Knights (KGH) weighed heavily on all listed law firms. However, Gateley’s (GTLY) half-year results look reassuringly robust. Legal services revenue grew entirely organically by 8.2 per cent, while management is using acquisitions to bulk up the group’s consultancy arm. This seems to be working: non-legal revenues jumped by 105 per cent in the period (20 per cent of which was organic) meaning consultancy now generates about a quarter of group sales.

As a result, Gateley is less reliant on a single discipline and should be able to enjoy some cross-selling opportunities.The strategy is not completely risk free, however. Acquisitions have depleted Gateley’s cash reserves, with net cash falling from £8.8mn to £1.1mn year-on-year.

Meanwhile, total lock-up - which represents work in progress but not yet billed - has increased from 143 to 159 days, which is worth keeping a close eye on. On the whole, however, Gateley seems to be handling macro pressures very well. Acquisitions mean its fee earner headcount has risen by 26 per cent to 1,000, but personnel costs as a percentage of revenue have decreased from 64 per cent to 62 per cent.

Moreover, while profitability has been impacted by an IT overhaul and the return of travel and marketing costs, the group’s underlying margin is still strong at 12.6 per cent. The second half of 2023 is likely to be challenging for parts of Gateley’s business, particularly its property division. But its increasingly diverse revenue streams and excellent track record keep us bullish. Buy.

Last IC View: Buy, 194p, 13 Sep 2022