Gateley: a case of value and income

Against this crowded backdrop, there is a significant opportunity for growth in the UK legal mid-market, which some estimates value at £8.8bn annually. This is where listed legal services group Gateley (GTLY) is focused. Its IPO in mid-2015 has allowed it to raise its profile with potential clients, fund acquisitions and attract high-quality young employees by offering share participation, which has noteworthy attractions over the industry’s partnership model, which looks increasingly outdated – as we explored in a recent sector focus article.

Significant progress has already been made on these objectives. Indeed, for the six months to October 2017, Gateley saw sales rise 9.8 per cent to £38.6m, buoyed by 8.4 per cent organic growth. Signalling the steady diversification of its revenue streams, the remaining 1.4 per cent of growth stemmed from two non-legal acquisitions: Gateley Hamer and Gateley Capitus. The former is a specialist tax incentives advisory business and the latter is a specialist property consultancy. Together, they offer strong cross-selling opportunities.

Gateley is also diversifying via internal investment. Its new global mobility platform allows employees to be relocated for international assignments. The potential for scale here is serious; forecasters suggest global mobility assignments could increase by 50 per cent by 2020.

Meanwhile, recruitment remains a central focus for management. Gateley’s headcount rose 6.4 per cent to 763 last year, including six partner hires – arguably proving the appeal of a public entity with share schemes available to all staff members.

Of course, such expenditure weighs on earnings. Half-year pre-tax profits were flat at £4.2m. But, encouragingly, the corporate, property, and banking and financial services divisions all reported double-digit revenue growth with improved profitability.

What are the potential challenges facing Gateley? First, it relies on case settlement to sustain cash generation. So along with net debt of £7.1m at the end of October receivables stood at £38.4m, or 47 per cent of sales in the preceding 12 months. Debt collection remains a priority for management. Second, there is fresh competition on Aim from Gordon Dadds (GOR) and Keystone Law (KEYS), both of which floated in 2017. However, for us, more legal IPOs simply render Gateley’s investment case more relevant.