MIDAS SHARE TIPS: You might loathe lawyers, but Gateley is one worth signing on the line for

By Joanne Hart, Financial Mail on Sunday

Published: 16:05 EST, 15 August 2015 | Updated: 05:05 EST, 24 August 2015

Lawyers tend to rank fairly low in the popularity stakes and are widely associated with making money from other people’s misery.

Gateley aims to give the lie to that unflattering impression. On June 8, it became the first law firm ever to list on the Stock Exchange, via a £100million float that valued the shares at 95p. They have since risen to 98p and offer good long-term prospects for growth and income.

Law firms fall into three categories in the UK – huge, international partnerships, working almost exclusively for multinationals and governments; small, independent lawyers, with a handful of professionals on the roster; and medium-sized practices, in between the two.

Big player: Gateley counts West Ham football club among its 5,500 clients

Big player: Gateley counts West Ham football club among its 5,500 clients

Gateley sits squarely in that mid-tier category, with clients ranging from individual business owners to three of the top clearing banks. This middle part of the market is crowded, but Gateley has several advantages that put it ahead of the pack.

The group prides itself on customer service and has the accolades to prove it. In the past five years, it has won more than 40 awards, mainly relating to the quality of its advice and the relationships that it builds with clients.

HOW THIS IS MONEY CAN HELP

The group also combines history with entrepreneurial flair. Founded in Birmingham more than 150 years ago, Gateley has expanded steadily in recent decades, organically and through mergers and acquisitions. 

Now a national firm with offices throughout England and Scotland, it has 5,500 clients, most of which are companies or their owners, including Mothercare, West Ham football club and housebuilders Barratt, Taylor Wimpey and Berkeley.

Gateley provides advice on a wide range of topics, such as acquisitions, pensions, employment, fraud, insolvency and property. About 80 per cent of customers use the group for more than one service and this has helped it to increase turnover and profits by more than 10 per cent a year for the past decade.

Now chief executive Mike Ward would like Gateley to grow even faster by providing more services to existing clients, acquiring other law firms with specialities that it does not have and even buying complementary businesses outside the law sector, such as training firms or employment consultancies.

Promising: One of Gateley's clients is retailer Mothercare

Promising: One of Gateley's clients is retailer Mothercare

That will be facilitated by the recent flotation, making it easier for Gateley to fund takeovers and making the firm more appealing to the management of other businesses.

Ward has already seen a difference in how Gateley is perceived since the float. Being the first law practice to list in London gives it a certain cachet and has attracted the attention of accountants and bankers, the people who introduce Gateley to most of its new customers.

The group has traditionally focused on its home market, but 60 per cent of outside investment in the UK and the Continent comes from America. Whenever US companies cross the Atlantic they need lawyers’ help and Ward is determined to capture some of that business. Being a quoted business is extremely useful in that regard, showing that Gateley is a big player and setting it apart from the pack.

Lawyers have been allowed to float since 2011, but many firms are quite old-fashioned and enjoy the partnership model. Gateley had 81 top partners and took two years to change to the new company structure. Following the flotation, these partners retained 70 per cent of the business and are not allowed to sell their shares for five years. That highlights their confidence in the future and should mean that their interests are neatly aligned with those of other shareholders.

Brokers believe the company has strong growth potential and it is committed to paying out 70 per cent of post-tax profits in dividends, so there should be some decent income.

Results for the year to April will be revealed in mid-September and analysts expect revenues to rise 10 per cent to £60.2million with underlying profits up 34 per cent to £10.5million. Revenue of almost £65million and profits of £11.8million are pencilled in for 2016, at which point the group will start to pay a dividend of about 6p.

Midas verdict: Investing in a law firm is unusual, but Gateley has increased profits consistently in the past and is expected to up the pace even more in the future. With strong growth and generous dividend income, this stock should prove rewarding. Buy.

 

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