The Investors Chronicle (IC) have put shares in law firm Gateley Plc on a BUY TIP following positive results to the end of last year. They reckon the firm has great long-term investment potential. But why has it taken two years for this to get a recommended ‘buy’ when the listing was back in mid-2015?
As the first UK firm to list, I think investors and commentators saw a law firm float as a step into the unknown. There was no consensus view on whether legal was a good area to be invested in or not generally, let alone this particular Birmingham based firm.
The lack of precedent put people off and so investors waited on the side-lines to see what would happen. The only historic point of reference for most people was the Slater & Gordon float on the Australian stock exchange and since that turned basket case there was suspicion about whether it could work. The volatility of its share price was a scary proposition.
Speculate to Accumulate
Critics have pointed out that a firm is only as good as its people and if you lose a few star performers then others leave like rats from a sinking ship and very quickly you’re left with nothing but some expensive real estate leases. That was largely addressed with a five-year lock-in period. You make some of the same argument against recruitment businesses or management consultants and there have long been those as key constituents of stock exchanges around the world.
The reality of the last two years for Gateley has been solid performance, successful expansion and profitable trading, with shares up 62 percent since the IPO. Importantly, given the business model, they’ve retained their key people, leveraged back-end technology and recent trading suggests that the future bodes well. Forecasts suggest the firm could do £16m in profit off £88m turnover in 2019.
No wonder they’ve had a progressive dividend regime from day one. What everyone who works in or with law firms knows is that firms have simple cost structures and profit margins to kill for. Normally you have to qualify as a solicitor then toil away for years to become a partner to get access to that wonga. As a plc anybody can get in on the spoils.
The IC points to bull points of strong organic growth, plenty of market demand and diversification of revenues through non-legal acquisitions – a specialist tax incentives advisory business (Gateley Capitus) and a property consultancy (Gateley Hamer). I can’t disagree with that.
On the Downside
The bear points they highlight don’t make sense to me though. They say that the rise in listed legal market firms is a threat. Recently listed Gordon Dadds and Keystone Law hardly count as direct competitors; of all the commercial firms out there, there’s no additional threat coming from the fact that those two are now public companies. It’s other national firms and international firms that are the competition.
Say CMS announced it would list, that would be an interesting alternative for an investor looking to put money in law businesses, but even then, that wouldn’t affect Gateley in terms of commercial trading. It really would be fascinating with a global firm – a Clifford Chance, Baker McKenzie or such – because as an investor you’d be limiting your exposure to a Brexit downturn. That might make you switch your investment choice but again, it’s not relevant in terms of competition for business.
Indeed, the real risks for Gateley are related to the UK economy and competition regionally and nationally. You’d be concerned when real estate faces a downturn and by extension, bricks and mortar retail operations are already showing cracks care of ecommerce’s onslaught. And while organic growth is good, there’s presumably the expectation to buy up smaller firms to continue to scale – can they do that without overreaching at some point?
Money Where My Mouth Is
To date they’ve not gone wild with the cash injected from going public. If anything, just the change in legal status has in itself been a boon to their trading, showing the likes of their many listed company clients (housebuilders, banks and retailers) that they’re entrepreneurially-spirited. The firm might be a long way off main market trading but even with just modest growth, I agree with the IC that this is a good investment opportunity as a combined value-income play. With a forward dividend yield of 4.5 percent, I bought in two years ago and plan to top-up again soon in the new tax year.
About the author: Graham Archbold
Pioneering the use of RATER in professional services, most recently he has led client insight studies in legal, accountancy and property. See Bio…