Gateley (AIM:GTLY), the legal and professional services group, is pleased to announce its unaudited results for the six months ended 31 October 2019 ("the Period"), demonstrating a strong performance with double digit growth in profitability and revenue.
Michael Ward, CEO of Gateley, said:
"The Board is pleased with the Group's first half performance, delivering another strong set of results and reflecting our broad, well-balanced service offering and our ability to both expand and invest for the long-term benefit of the Group's stakeholders. Investment in our staff complement continues, with employee headcount now exceeding 1,000. As we grow, we continue to support our employee aspirations through both exciting career progression opportunities in an expanding business together with the delivery of meaningful shareholdings being achieved via our range of share schemes.
"Exceeding our client's expectations remains at the forefront of our service ethos and true to our culture and beliefs. We believe the Group is well placed to continue to expand. We remain confident that the business is well positioned to deliver in line with market expectations for the full year."
Chief Executive Officer's Review
I am delighted with the performance of our legal and professional services group in the first half of the financial year, where not only has our core legal services business performed well but we have continued to seize opportunities to invest for future growth through further expanding our staff complement and diversifying our income streams through two more strategic acquisitions.
Persona Associates Limited (Persona) and T-three Group Limited (T-three) have joined the Gateley Group since our last year end. I'm confident they have widened our go-to-market options and strengthened two previous non-legal acquisitions, those of Gateley Hamer Limited (Hamer) and Kiddy and Partners (Kiddy). I expect both new businesses to enhance the delivery capabilities of all our previous acquisitions and importantly our legal service lines by offering choice and opportunity to clients through the creation of two very unique business offerings in attractive markets with exciting prospects.
As we approach our fifth year on AIM, having been the first UK commercial law firm to take the bold step of changing our business structure to enhance the opportunities available to the Group I am pleased to be handing the CEO role of the business over to Rod Waldie at a time of exciting opportunity in the legal and professional services market. During our time on AIM clients, investors and staff have all benefitted from our strong performance that has seen us grow turnover and profits by over 70%, double our share price and provide even further diversification away from being just a purely legal services business. The transition to Rod's leadership was announced in July 2019 and I'm pleased to say that the business is on course to effect a smooth transition from 1 May of this year. Succession planning is an important part of Gateley's corporate governance and is key to ensuring that the prosperity and collaborative culture of the business is maintained over the long term.
We pride ourselves on being a forward-thinking business, which provides straight-talking advice to a wide range of clients and delivers sustainable profitable growth and income returns to our shareholders.
Our strategy and cultural advantage continues to deliver growth in revenue, profit and cash generation. Our diverse revenue streams have grown by 11.8% in the Period, predominantly organically, whilst profit before tax increased by 10.2% and profit after tax by 12.0%. Strong cash generation has resulted in net debt at 31 October 2019 of £2.1m, the lowest level since admission to AIM. Our investment in recruitment and branding provides an ever-stronger base from which to move forward as a team. We strengthen and build our national teams carefully, investigating each business and investment case and also ensuring a good cultural fit.
The strength in depth of our core legal business creates appealing opportunities across many business types and sectors. Whilst transactional activity levels across Corporate, Banking and Financial Services and Property segments remain significant, our long-established expertise in Employment and Business Services, such as litigation and dispute resolution work, has produced significant returns against a backdrop of a challenging property market and unprecedented political uncertainty. The strength of our connections nationally, across boardrooms and intermediaries, and our reputation for quality teams with a genuine focus on client service, result in repeat instructions across many sectors.
The Board is committed to maintaining a progressive dividend policy and is pleased to declare a further increase of 11.5% in the level of the interim dividend to 2.9 pence per ordinary share (H1 19: 2.6 pence). The interim dividend will be paid on 31 March 2020 to shareholders on the register at the close of business on 21 February 2020. The ex-dividend date will be 20 February 2020.
It was extremely pleasing to see Gateley win the 2019 UK Law firm of the year at the British Legal Business Awards in November 2019. In addition we once again topped the Experian MarketIQ league tables, as the leading legal deal advisor in the UK based on volume, and received recognition through numerous regional and national corporate awards.
In the Period we saw significant growth in our fee earning staff, ending the period at record levels. We established a Private Wealth team operating nationally out of London, and expanded our regional Housebuilding practice across the UK. We bolstered our Corporate team in London and added strategic Real Estate expertise in growing office locations in Leicester and Leeds. The reach of our litigation and restructuring legal teams was also expanded during the Period with work predominately sourced from overseas, where expertise in the UK legal system is a priority for clients.
We recruited five new partners in the Period and promoted six staff members to partner, demonstrating the ongoing attractiveness of Gateley to partners wishing to develop or establish long term careers with us. Our team approach to sharing clients and opportunities, enhanced by our non-legal complementary businesses, remains a significant draw at the top end of the recruitment market. Whilst growth generated from laterally recruited partners can sometimes create a temporary lag in activity and ultimately fees, due to individual's restrictive covenants or the time it takes for new partners' former clients to change legal service provider, we remain confident of the robustness in our take-on procedures to ensure our recruits are the right long-term cultural fit.
Our existing share schemes are now delivering tangible benefits to staff as reward for their loyalty and performance. Our second Stock Appreciation Rights Scheme ("SARS") vested on 1 October 2019, resulting in over 0.9m additional new shares (net of tax liabilities) being awarded to partner level staff whilst our first SAYE scheme vested on 1 October 2019, delivering a 70% return on staff investments resulting in 0.8m shares being received across all staff levels. Our initial middle management CSOP reward scheme matured on 20 December 2019, this scheme is aimed at beginning the shareholding journey of our dedicated junior lawyers, professionals and management level support staff, which will also provide meaningful returns for the hard work of staff over the last three years.
As announced on 17 October 2019, the Group has also introduced a new five-year Orderly Market Agreement that will commence at the end of the current five-year agreement on 8 June 2020 and expire on 8 June 2025. We remain focused on investing in the right people to join the Gateley team and our plc status supports this by providing an attractive alternative to traditional law firm ownership models. A new Long-Term Incentive Plan ("LTIP") has also been introduced to replace our existing SARS, creating greater alignment to the profit performance of the Group and greater clarity over the impact of dilution going forward.
We have committed to a new ten-year lease on our second largest office, Manchester and will shortly be relocating our 90+ strong Guildford team to larger nearby offices to facilitate further expansion of services across the south of England, also on a ten-year lease. We have taken office space back from a long-standing sub-tenant in Paternoster Square, London due to the continued growth of the office, including the facilitation of London bases for Kiddy, Hamer and Capitus. Our existing London base provides niche service lines and acts as a gateway for our national and international clients.
Our acquisition strategy focuses on niche businesses which can complement our core legal services offering. All our acquisitions to date have been in growth phase, with their owners seeking the right business partner to enhance the next stage of their growth and provide a platform for integrated expansion. Our established culture and national network help achieve this. Our wide and diverse client base continues to benefit from the added value services provided by our enlarged legal and professional services group. We have this year focused on expanding two of our established acquisitions, Hamer and Kiddy, by acquiring the strategically aligned and established businesses of Persona and T-three.
We were delighted to welcome the Persona team on board at the end of July 2019. Persona and Hamer have worked together on a number of long-term projects in recent years, and there are many synergies that will benefit clients. There is also an opportunity for Persona to develop within our Property group, as Hamer has done in the last three years, and we look forward to supporting its future development in line with our growth plans.
More recently, in December 2019, we were delighted to welcome the T-three team to our growing Group. We see huge potential from the expansion of our Human Capital consultancy services, as T-three and Kiddy complement each other's strengths. Both businesses sit within our Employment, Pensions and Benefits group.
All our acquisitions have been immediately earnings enhancing.
Current trading and outlook
Opportunities for growth continue to present themselves and the Board strongly believes that the potential remains to broaden our proposition for our clients and investors. We continue to strive to enhance our offering for the benefit of all stakeholders and build upon our proven reputation and track record for the delivery of a quality service, and strong revenue and profit growth with high levels of cash generation.
As we approach the end of our first five years on AIM, I am pleased with how the business has performed and delivered on its to commitments to staff, clients and investors. The Board remains confident that Gateley is well positioned to deliver a performance for the full year in line with market expectations.
Finance Director's Review
Revenue for the period increased by 11.8% to £51.8m (H1 19: £46.4m) of which organic growth was 10.5%. Revenue from the Group's core legal services was £48.6m (H1 19 £44.0m) and from non-legal services was £3.2m (H1 19 £2.4m). Following the acquisition of T-three in December 2019, non-legal revenues are anticipated to generate not less than £14m in the year to 30 April 2020. The Group continues to demonstrate annual revenue and profit growth, whilst actively seeking opportunities for greater strategic expansion. Headcount once again increased to meet client demand and we continue to attract senior (revenue generating) hires. We have secured a number of good own commercial property deals in Manchester and Guildford that will increase our operational capacity and reduce cash outflow over the medium-term.
Our strong performance in Mergers & Acquisitions and Private Equity have been complemented by growth in our revenues from Employment, Pensions and Benefits and Business Services. Kiddy continues to perform well and will be further complemented following the acquisition of T-three in December 2019. Cross-selling remains a primary focus across all our business lines and our diversification across complementary services continues to create opportunities across the Group. Against the backdrop of a more generally uncertain commercial property market during 2019 our Property group has demonstrated marginal revenue growth of 1.5% during the period which we believe outperforms the wider market and follows a strong performance during the equivalent H1 19 period. Gateley is well placed to take advantage of opportunities at both regional and national level in the UK's construction, property development and housing markets which rely upon long-term specialist legal support. Our acquisition of Persona, which specialises in land referencing consultancy also gives us much earlier visibility on long term infrastructure projects.
Total expenses increased by 10.9% to £45.9m (H1 19: £41.4m) due to continued organic expansion across services lines and geographical locations to meet growing client demand and service delivery aspirations, staying ahead of technology advancements and capitalising on the significant opportunities being created. Growth in expenses has been driven mainly by the expansion in staff numbers. Average numbers of legal and professional staff rose by 21.9% to 673 (H1 19: 552) whilst support staff numbers rose 3.5% to 325 (H1 19: 314). Personnel costs, including increased share-based payment charges, rose by 10.5% from £29.5m to £32.5m. However, personnel costs as a percentage of fees reduced to 62.8% of revenue from 63.5% in H1 19. Excluding share-based payment charges, staff costs also fell to 61.8% of revenue from 62.7% in H1 19.
Other operating expenses increased by 11.6% to £13.5m (H1 19: £12.1m). This increase was predominately due to £0.4m of Kiddy operating costs as H1 20 includes six months of trading compared with four months in H1 19, £0.1m of costs from four months of overheads following the acquisition of Persona, together with planned overhead expenditure on information technology (£0.5m), rebranding (£0.2m), and increased travel and accommodation costs (£0.1m) together with an increase in marketing activity in H1 19 compared to the same period last year (£0.1m).
Profit before tax (PBT) of £5.5m increased by 10.2% from £5.0m resulting in a PBT margin of 10.7% (H1 19: 10.8%).
Earnings Per Share
Basic earnings per share increased by 10.11% to 3.92p (H1 19: 3.56p). Underlying diluted earnings per share increased by 8.75% to 4.60p (HY 19: 4.23p).
The effective rate of taxation on profit on ordinary activities was 21.1% (HY 19: 22.4%). The deferred taxation liability carried forward at H1 20 was £0.6m (H1 19: £0.6m). The Group has made payments on account of tax totalling £1.7m in the period (H1 19: £1.4m).
The Board's dividend policy reflects the strong long-term cash generation and earnings potential of the Group, distributing up to 70% of profit after tax (PAT) each year to shareholders. The Board proposes an interim dividend of 2.9p (H1 19: 2.6p) per share that will be paid on 31 March 2020 to shareholders on the register at the close of business on 21 February 2020. The shares will go ex-dividend on 20 February 2020. This ensures shareholders' dividend growth is in line with PAT growth of 12.0% (H1 19: 18.0%).
Persona was acquired for an initial consideration of £0.4m rising to a maximum of £0.45m following the successful relocation of this Horsham based land referencing consultancy and its staff to our new Guildford office. T-three was acquired after the period end for an initial consideration of £3.17m rising to a maximum £4.07m based on performance over the next two full financial years ending April 2021 and 2022.
Net assets and net debt
The Group net asset position has increased by £7.9m to £31.0m (HY 19: 23.1m) due to the following movements:
- £1.3m increase in non-current assets due to intangible assets
- £4.9m increase in total current assets resulting from £2.5m more trade and other receivables available for collection and £2.4m of cash at the bank
- £4.6m decrease in total liabilities, before IFRS 16 lease liabilities, mainly as a result of the repayment of total debt
Total net debt decreased to £2.1m from £8.2m at H1 19 due to strong cash generation, and in contrast to last year, cash was not used to provide short term funding of the Group Employee Benefit Trust during the period.
Debt at the Period end comprises of the following items:
- Unsecured term loans of £4.4m (H1 19: £7.0m), of which £2.6m is repayable within the next 12 months, followed by a further £1.8m on a quarterly basis to September 2023
- Loans from former partners of acquired businesses £0.2m (H1 19: £0.9m)
Working capital and cash flow
Trade receivables totalled £32.2m compared to £30.5m at the end of H1 19. The additional £1.7m in trade debtors is proportionate with the growth of the Group. Overall the Group has seen an improvement of 9 debtor days due to a focus on working capital and collection processes. The Board are pleased with the progress made here but believe we can improve further as a result of initiatives being run across the Group.
At the period end unbilled revenue recognised in its statutory accounts from time recorded on non-contingent work totalled £12.2m or 11.2% of revenue recognised over the last 12 months compared to 12.2% for the previous H1 19 and 10.3% at the end of FY19 where the billing cycle is most active ahead of the Group's April year end.
Cash generated during the period from operations was £6.3m (H1 19: £4.3m) which represents 143.8% (H1 19: 110.5%) of profit after taxation. Capital expenditure decreased to £0.9m (H1 19: £1.3m). Cash outflow from financing activities of £5.9m was similar to outflows of £5.7m at H1 19, as higher dividend and loan repayments were offset by the receipt of cash from the sale of shares issued and subsequently sold by various option holders in order to settle options exercised-related personal tax liabilities. The Group continues to operate with a low level of gearing and fixed term debt. This position is reviewed regularly to ensure appropriate funding levels are in place to support the Group's expansion.