Consulting drives growth at Gateley

Gateley’s (GTLY) latest report is a bit of a head-scratcher. Statutory figures suggest the professional services firm had a disastrous year. Profit before tax is down by 40 per cent at £16.2mn, while basic earnings per share has collapsed by 50 per cent to 9.77p. However, the group is celebrating an “unbroken record” of adjusted profit growth. What’s going on?

The answer relates to accounting as opposed to operations. After discussions with the Financial Reporting Council, Gateley has changed the way acquisitions are presented in its accounts. In a nutshell, contingent consideration – ie the obligation to make extra payments if an acquired business meets certain conditions – now goes through the income statement, rather than appearing on the balance sheet as goodwill. 

This ultimately boosts profits in the immediate aftermath of an acquisition, but decreases them in subsequent reporting periods as contingent consideration moves through the P&L. The change also reduces the amount of goodwill on the balance sheet. Crucially, however, it does not affect the group's cash position, or – according to management – alter Gateley's underlying performance in any way. 

It makes sense on this occasion, therefore, to concentrate on the adjusted numbers, which look relatively strong. Organic revenue growth was 6.2 per cent in the period, driving an 11 per cent rise in adjusted operating profit to £25mn. The consultancy division, which now generates a quarter of group revenues, was particularly impressive, growing organic sales by 18.4 per cent. Gateley’s move away from pure legal work is clearly paying off. 

Margins came under a bit of pressure as a result of salary inflation and the return of more travel, marketing and entertaining costs. Meanwhile, transactional work slowed down after last year’s “unprecedented highs” and net cash shrank from £10.4mn to £4.3mn as more money was sucked into lease payments and property, plant and equipment purchases.

Ultimately, though, we still like Gateley’s rapidly expanding consultancy arm and the resilience the business as a whole has shown during a difficult economic period.

Last IC View: Buy, 191p, 18 Jan 2023