Profits plateau at Keystone

Concerns about Keystone Law’s (KEYS) growth prospects have weighed on its share price in recent months. Can a legal services platform, which needs to hire more lawyers in order to expand, thrive in today’s labour market? Or, without acquisitions, is growth destined to stall?

Its latest results suggest that Keystone is hardier than many investors feared. The group ended the year with 398 senior lawyers – referred to as principals – compared with 394 in 2022. In total, it now has 507 fee earners, compared with 481 last year. These figures are hardly spectacular but, given the state of the legal recruitment market, it was possible that Keystone’s staff base could have actually shrunk. 

Helped by “strong” client demand, Keystone’s bigger pool of lawyers increased group revenue by 8.1 per cent to £75.3mn. Revenue per principal also edged up by 4.1 per cent to £190,000.

However, profit growth was hampered by a 14 per cent rise in administrative costs. Wages were a big factor, and the group has also been investing in its technology platform to drive greater efficiency. As such, statutory profit before tax plateaued at £8.4mn. When Covid-19 cost savings are stripped out of last year’s figures, however, Keystone achieved adjusted profit growth of 6.3 per cent. 

One thing to keep an eye on going forwards is Keystone’s cash position. The company is typically very cash generative, because its most significant cost – the fees doled out to lawyers – is only paid once the group has been paid for the work it has delivered. This is at odds with its listed peers, several of which struggle to manage working capital.  

However, Keystone itself came under a little more pressure last year. Trade debtor days – the average number of days taken to collect a payment from clients – rose from 32 to 36. Meanwhile, operating cash conversion fell from 102.7 per cent to 96.5 per cent year on year. A closer look at the cash flow statement shows a sizeable increase in trade and other receivables, and no equivalent move in payables. 

Ultimately, however, Keystone still has a defensive cash flow profile. Meanwhile, management noted that the recruitment of lawyers across the industry was “cooling slightly”. Combined with continued strong demand from clients, this should kick-start profit growth this year. With a forward price/earnings ratio of 20.1, Keystone isn’t cheap. However, it is significantly less expensive than its five-year average of 31.9. Buy.

Last IC View: Buy, 510p, 15 Sep 2022