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Keystone stands out from legal crowd

Law firm’s lean business delivers strong growth, in spite of the tight jobs market
April 28, 2022
  • Profit margin grows 
  • Group proposes special dividend

In a world of wage inflation and home-working, Keystone (KEYS) is going from strength to strength. The law firm operates as a platform, and its senior lawyers, known as ‘principals’, are essentially self-employed, taking a direct chunk of what they bill. Most work remotely, but a small set of premises – together with IT infrastructure and junior legal support – is available for everyone to use.

This lean business model generated revenue growth of 27 per cent in the year to 31 January and boosted adjusted profit before tax by over 50 per cent. The company is also highly cash generative, as its biggest cost – fees owed to its solicitors – is only paid once clients have coughed up. Operating cash conversion crept up in 2021 to 103 per cent, and the group remains debt free. Its hefty cash pile means it is offering a special dividend of 10p, together with a full-year dividend of 15.7p.

Wage inflation is a big problem for law firms, whose success is rooted in the quality of their solicitors. So far, however, Keystone seems to have dodged the worst. Indeed, its profit margin rose from 9.8 per cent in 2021 to 12 per cent in 2022. This is partly due to Covid-19 restrictions, which depressed the group’s administrative expenses – not many social or networking events took place last year. 

However, Keystone also noted that its pool of centrally employed lawyers were busier than usual, which helped to boost productivity. 

The big question for Keystone is not about quality; its business model is clever and its lawyers are well-respected. However, its growth prospects remain open to debate. At the moment, the only way the company intends to grow is by hiring more lawyers (Its organic approach is very different to legal peer Knights Group (KGH), which started hoovering up companies as soon as it floated). Demand for legal services is high, and job vacancies abound, so this could prove to be an issue going forward. 

However, the group is managing to increase its headcount: the number of principals has risen from 369 to 394 year on year. Meanwhile, the number of junior lawyers employed by principals increased from 74 to 80 year on year. The popularity of home working could have something to do with this. 

Keystone has always traded at a premium compared with other listed law firms. However, now might not be a bad time to buy. The shares have been in decline since the start of the year, influenced in part by a profit warning from Knights. Today’s strong results – and Keystone’s proven ability to disrupt the legal market – should reassure investors. Buy. 

Last IC View: Buy, 875p, 27 Jan 2022

KEYSTONE LAW (KEYS)   
ORD PRICE:705pMARKET VALUE:£220m
TOUCH:690-720p12-MONTH HIGH:910pLOW: 523p
DIVIDEND YIELD:2.2%PE RATIO:33
NET ASSET VALUE:60p*NET CASH:£9.37mn
Year to 31 JanTurnover (£mn)Pre-tax profit (£mn)Earnings per share (p)Dividend per share (p)
201831.61.936.000.80
201942.74.7512.29.00
202049.65.2313.33.20
202155.05.4113.817.2
202269.68.3621.315.7
% change+27+55+54-9
Ex-div:16 Jun   
Payment:08 Jul   
*Includes intangible assets of £5.8mn, or 18.5p a share. NB: FY 2020 payout excludes 8p special dividend, while 2021 final dividend includes 6.8p in catch-up payments from prior year. 2022 does not include 10p special dividend.