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Listed law firms have published a number of reassuring statements in recent days. At its annual general meeting, DWF said trading was still in line with expectations, while regional group Knights reported a “positive start” to its financial year. Revenue and profits are also up at Gateley and analysts have argued that legal work should prove defensive as the economic outlook deteriorates.
Nevertheless, shares in legal practices have seriously underperformed in 2022. “Challenger” firm Keystone Law is no exception: it has lost around half its value since its January peak. Spotting an opportunity, Keystone chief executive James Knight has bought 111,110 shares in the group for £500,000. He now owns 28.6 per cent of issued share capital.
Keystone reported a solid set of results for the six months to July 31, with turnover up 9 per cent. Profitability was hit by the return of networking costs — which were all but wiped out during lockdown — but average revenue per fee earner is growing strongly, and operating cash conversion of 101 per cent is still a key draw.
The main issue Keystone faces is recruitment. The group is committed to an organic growth strategy, but faces — in the words of its half-year report — “one of the most challenging recruitment markets in over a decade”. It is holding up well so far, adding 22 senior fee earners, known as “principals”, to its platform in the past six months. Meanwhile, Knight is confident Keystone remains a more attractive place to work than many of its non-listed competitors.
With a forward price-to-earnings ratio of 19, Keystone still isn’t cheap. However, compared with a five-year average of 32.9, it is better value than it has been for a while, and demand for mid-market legal services is looking resilient.
LCM chair puts up own funds
When a company publishes a disappointing set of results, its executive directors sometimes buy a token number of shares to bolster investor confidence. The sums splashed out by Litigation Capital Management’s (LCM) leadership team suggest they are genuinely convinced of its potential, however.
On September 26, LCM chair Jonathan Moulds purchased 770,000 shares for £559,000. A couple of days later, he bought 100,000 more for £73,000, taking his total stake in the company to 2.68 per cent. Chief executive Patrick Maloney also got involved, buying 76,750 shares for £56,500, which increased his stake slightly to 8.62 per cent.
Moulds has been on something of a buying spree in recent months, purchasing over £500,000 of shares in February this year, and £650,000 of shares in December.
Shares in LCM have fallen by over 30 per cent since January, after profits failed to take off as expected. The funder, which bankrolls legal cases and takes a share of the winnings, has experienced similar issues to Burford Capital.
For starters, it has complained of delays in the justice system since Covid-19 took hold. This, in turn, has extended the duration of its investments from 27 months to between 36 and 42 months, making investors nervous. (The “weighted legal life” of Burford’s cases has also risen from 19 months to between 24 and 29 months).
Analysts have significantly lowered their profit estimates on the back of recent results. However, with total assets under management on the rise and a strong record to draw on, LCM could be due a recovery.
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