Fiscal 2018 Trading Update and Acquisition

Gateley is a broad-based commercial law and complementary professional services group. It is a leader in the UK mid market, and has seen double digit revenue and profit growth over more than 10 years. This trading update confirmed that full year FY18 results will meet market expectations, and was accompanied by its third acquisition since IPO, the first in the legal sector. The deal is highly complementary and was done with a mix of shares and cash, an option not available pre-IPO. We have fine-tuned our next year forecasts upwards for the acquisition, which is immediately earnings enhancing.

• Current Trading: The trading update confirmed that the group’s strong organic growth continues and that full year profits will be in line with market expectations. Interims showed growth in revenue of 10% (mainly organic) and of 6.3% in EBITDA, and full year numbers will be somewhat better, while next year will be boosted by the latest and largest acquisition to date.
• Forecasts:  We forecast organic revenue growth of 7% this year and next, leading to earnings per share growth of c. 8%. The latest acquisition fits well with Gateley’s strength across many property and land related clients and further boosts revenue and profit growth.
• Valuation: the stock market will often ascribe a low/prudent valuation to a new sector, and as market participants become more familiar with the industry, the valuation has potential to grow. Increased activity in the sector may create further acquisition opportunities for Gateley.
• Risks: The company has broad exposure to the UK economy, primarily to SMEs. Earnings were resilient during the global financial crisis, and we would expect any economic slowdown to have limited impact, with some drift in working capital, and a lesser impact on earnings. Retention of key people remains good, and this acquisition includes 4 year lock- ins for key individuals in keeping with Gateley’s IPO strategy, and management’s objective of encouraging earlier and widespread equity ownership.
• Investment summary: Gateley is a high quality professional services company with significant growth potential as it has a small share of a growing and consolidating market. It has a good track record, a strong management team, and considerable grow potential. It offers a dividend yield of over 4%.