Gateley (AIM: GTLY) is the UK’s only full-service commercial law firm with a stock market listing. It’s been on AIM for two years and the shares have done well, almost doubling from the 95p placing price. The year to April provided ample support for this performance with both revenues and profits up 15 per cent. The dividend was lifted 17 per cent, giving a useful 3.6 per cent yield.
Part of Gatelely’s appeal is the fact that it is broadly-based, both geographically and by discipline. The origins of the company and its head office are in Birmingham, and while it has a London presence, there are five other offices in major English cities alongside Belfast and Dubai. Of the four divisions, the two star turns last year were Corporate and Property which each saw revenue growth in the 25 per cent region. Gateley currently ranks first in the UK market for corporate deal volume, while its property division benefited from strong activity in logistics and distribution, as well as from a couple of bolt-on acquisitions.
The ability to make acquisitions in a fragmented market which is worth over £30 billion was part of the motivation in converting to a PLC from a traditional partnership structure. CEO Michael Ward says he has an active pipeline of deals but will be choosy. Ideally he’d like to do one a year, since the aim is to integrate acquisitions and extract synergies, rather than buying stand-alone businesses.
As a people business which sells the time of its professionals, there isn’t much operational gearing. Costs moved up in line with revenues, while staff utilisation rates slipped from 89 per cent to a still-respectable 86 per cent. However the good momentum from last year has continued into the current period. Mr Ward says low interest rates are keeping activity levels buoyant by encouraging corporate and property investment. There should also be some benefit from eliminating losses of £0.4 million in the Dubai office via cost-cutting.
Gateley proved relatively resilient during downturns as a partnership, but there will be some cyclicality to the business. Just 10 per cent of staff costs are variable, which only leaves a bit of wriggle-room should things turn down. However broker forecasts are for further growth, putting the shares on a current year p/e of 17 and prospective 4.1 per cent yield. The stock has been justifiably rerated on the back of delivering good numbers and that valuation looks about right. Though a good acquisition could well generate upgrades.