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It’s been playing on my brain for a while that I fancy scribbling a Stock Blog and I guess this is it !! Or at least Part 1 of it. I like doing these because they give me a very structured way to do research and I know Readers like them and of course it is exactly this kind of thing that attracts new Readers to read my twaddle. I like to keep my hand in on writing about Stocks as well and I don’t feel like I have written many of late as the Markets being what they are I have not felt a great impulse to buy much, and therefore there is not a huge need for me to do research. But it is good maintain my questionable ‘skills’.
So I am not sure if I will actually end up buying some Gateley Holdings GTLY but I am certain many Readers hold the Stock and it will perhaps assist people who have been considering buying some. No doubt doing this exercise will help me make my mind up.
I had actually considered many other Stocks (if you go to the ‘Little Black Book’ section of my Websites which sits on WD2 then you can see the universe from which I was getting my inspiration) but although I am sure I could have pretty much chosen any of them and over time they would likely do well, in practice nearly all of them had some aspect that put me off and if anything GTLY was the one that had the least ‘negatives’ that I could easily identify. It is funny how the slightest thing can psychologically affect my judgement and on several Stocks it was things like Director Sells or Sells by previously large Holders that particularly concerned me and on some the high ratings I find unattractive and of course that old fashioned timeless classic of simply having a huge amount of Debt. Hopefully GTLY won’t have any negatives of such magnitude. But all it takes is that one ‘significant’ drawback and I can switch my mind totally from almost being utterly besotted by a Stock to “Hmm, I’m not so sure now……”. Actually, this kind of things worries me because I think I am prone to being put off great Stocks for some imperfect ‘reasons’ and this could be costing me money. It is a difficult psychological bias to overcome though. I had been considering about 3 Stocks in a big way and GTLY was perhaps not top of the pile. However, a chat with @conkers3 on an unrelated matter where I dropped the Stocks into our discussion helped me realise that in fact I could write a Blog on all 3 of the Stocks if I wanted to and the crunch point was that I don’t actually need to buy Shares in any of them. The Markets are clearly a bit moody (I am typing this on the 5th October 2019) and there is no rush to buy anything and I have loads of Stocks so if Markets generally go up, which I suspect is unlikely, then I am nicely exposed. And if Markets fall, then I am sitting on a fair bit of Cash and I have Hedges in place so I am positioned for either outcome. Once things are better, I could buy GTLY and I could buy one of the other Stocks (or both !!) if I want to. There really is no rush. Company Overview Gateley is a legal and professional services group and this text I found in their Business Overview Presentation outlines the business sectors they focus on: ‘We offer clients a full-service legal offering, delivered by our five business groups:
They address these Markets via 6 Business Divisions, as per this slide:
When you look at those Divisions it is clear they mostly do very different things which could give some resilience across Economic cycles. Note it is not all Legal stuff and for example Kiddy & Partners seems to be more about Talent Management and HR stuff.
If you look at the History bit it is clear that much of the GTLY growth since IPO has come from acquisitions and I suspect this sort of thing will continue. Of course we need to be wary of too much acquisition especially if they are too big or a bad fit or too expensive, but small ‘bolt-on’ acquisitions done well can be a great way to grow a business. There is also an argument that Companies who do lots of regular bolt-on acquisitions actually can get rather good at it in terms of identifying and assessing acquisition opportunities and also in terms of the integration once they are in the fold. So the risks of such acquisitive strategies can actually be lower than is commonly thought. I found this text on the website under the ‘History’ bit I think and it is probably worth noting and in essence says that being Listed helps GTLY attract talented staff and that is believable: ‘We had first mover advantage following our IPO and have attracted many new people to the business since then based on our reputation as a stand out place to work, our forward thinking, modern business model and the ability to offer a rewarding career path that plays to people's strengths and ambitions.’ You can see a Presentation from July 2019 here that gives a good overview of the GTLY business. Note it is particularly good on the Business Divisions with a detailed Slide on each one: https://gat03gateleyplc-live-3ba9dee03d254d0987-a97856d.divio-media.net/filer_public/e4/5f/e45fff6c-f29c-476b-9d86-9c9cd2c5f273/background_deck_for_prelims_2019_final-website.pdf Company Website You can find the Website for Gateley PLC here: https://gateleyplc.com/ and the ‘Investors’ bit is here: https://gateleyplc.com/investors/ Key Risks Here are the Key Risks that I feel apply here. For a more detailed list, look further down this Blog:
Key Attractions For me personally, the appeal of GTLY as a potential buy arises from:
‘Economic volatility promotes a need for legal advice (contract redrafting, changes in the workforce, asset disposals, balance sheet restructuring etc.) and promotes litigation.’
‘We are a cost-effective solution when compared to leading City and international firms.’ Company History This chunk of text directly grabbed from their website, gives a sense of the early history: ‘Our origins can be traced back to the 19th Century when the commercial law firm of Stephen Gateley & Sons was established in Birmingham. Four generations of the Gateley family grew the firm from its Victorian beginnings to service the rising industrial and commercial needs of both individuals and their companies in Birmingham and the surrounding region.’ This next bit brings things forwards a long way: ‘The practice of Bernard Wareing was formed in the early part of the twentieth century and was equally committed to helping the mercantile activities of Birmingham prosper in an age when the city was renowned for being ‘the workshop of the world’. These two firms came together in 1974, initially as Gateley Wareing & Co, and grew from just 12 people, to over 200 by the late 1990s. Today the group employs around 1,000 people across nine UK locations and an office in Dubai.’ They add underneath this that there are 7 Businesses in the Group. This text then lays out their reasons for IPO and my belief is that they were the first of the current moderate flurry of Law Firms to list: ‘Recognising an opportunity to adopt a business structure that would support and enhance growth, we were one of the first UK law firms to take advantage of the changes to the law in England and Wales to adopt an Alternative Business Structure (ABS), allowing non-lawyers to own and invest in law firms. On 8 June 2015, Gateley listed on the London Stock Exchange’s growth market, AIM, a move that has enabled us to create a solid platform for continued growth.’ This next piece of text I take as very important and useful for me as a potential Investor – that is an impressive record: ‘In the last 30 years we have grown consistently with an unbroken record of increased profit delivery year on year. This has been achieved through an expansion of business services and a focus on a business mix that offers sustainable growth through a variety of macroeconomic conditions.’ The following 2 ScreenGrabs outline the progress since IPO:
All the text above I have grabbed from the page below and I have chopped it about so you can get the full history here:
https://gateleyplc.com/investors/investor-overview/gateley-story/ Strategy You can read about the Company Strategy at this link: https://gateleyplc.com/investors/investor-overview/strategy/ There isn’t much to argue with here – it all seems quite sensible. Of course it is important that any Acquisitions are carefully chosen and executed well to integrate them into the Group and they mustn’t overpay. Provided they keep to fairly small ‘bolt-on’ Acquisitions then this shouldn’t cause too many problems although of course as Investors we need to evaluate each Acquisition as it arises and on its own merits (or not !!). There is also more detailed information about the Strategy on Page 12 of the Annual Report from 2019 – there is a Link further down this Blog for the Report. GTLY Competitive Environment As always this is the really tough section to complete and I have no doubt if Readers wish to do more research then this is an area that they should look at. However, for my requirements, I don’t see any huge issues to worry me in this regard. According to the GTLY Presentation, the overall legal market is worth £30bn, but it needs to be appreciated that this will cover all sorts of different segments and niches which are nothing to do with GTLY and it is highly likely that the more realistic addressable Market for GTLY is vastly smaller. However, it would still be likely that there is plenty for GTLY to grab as they acquire more Legal Firms and consolidate them into the Group. Having said that, they will not be alone in this and overall l get the impression that Legal Services is becoming an increasingly competitive Market and the main reason for this is a degree of deregulation that has come about following recent Government reforms. In addition, it is perhaps fair to say that smaller Law Firms based on the Partnerships model have probably been quite ‘old-fashioned’ in their approach to business and as time goes on I suspect this is changing a lot and all the Companies involved are getting ‘sharper’. There are a range of different types of Law Firms that will be competing with GTLY although some at the smaller end could turn out to be possible acquisitions. These are organisations such as the following types:
No doubt there are other Competitive models but those are the key ones I think. It is clear GTLY faces a lot of Competition for Customers and I assume that relationships and good Customer Service are extremely important in this industry. It is likely that Customers are quite ‘sticky’ once they are captured provided that GTLY does a good job and there is scope for cross-selling of services and for building the business in that way. I would also assume that it is the sort of business where having intricate and detailed knowledge of a Customer’s operations and organisation add to the stickiness and provide a strong competitive edge when it comes to keeping ‘captured’ Customers. The 6 Divisions that GTLY has have many distinct Market Segments and this is likely to help reduce the dangers posed to the Company by competitive threats. For example, the Talent/HR Division will have very different competitors to the other bits. With a 30 year record of growing Profits it is pretty clear that GTLY has been competing very effectively for a long time. There are more aspects of Competition that I discuss in the ‘Risks’ section just below. Risks These are the Risks that I see as significant:
If you go to Page 15 of the GTLY Annual Report for Y/E 30th April 2019, this lists the Company’s view of the ‘Principal Risks and Uncertainties’. You can find the Report at the link just below. Note there are some useful bits there on the following:
https://gat03gateleyplc-live-3ba9dee03d254d0987-a97856d.divio-media.net/filer_public/90/ca/90cafce2-63e7-413e-a91e-6706956e1a17/gateley_annual_report_2019.pdf Why Invest in Gateley? Whilst digging through the Website I found this which is worth reading: https://gateleyplc.com/investors/investor-overview/why-invest/ Make sure you click the ‘READ MORE’ button that I have shown on the ScreenShot below:
From the text that you get to after clicking the ‘READ MORE’ button, I note the following bits in particular:
That first point about 95% Cash Generation is very attractive. Listing Details Index AIM (but don’t let that put you off !!). Country of Incorporation United Kingdom Company Registration Number Gateley (Holdings) Plc Registered number 0931007 Registered Office All other offices other than Dubai - Gateley Plc, registered office: One Eleven Edmund Street, Birmingham, B3 2HJ. Registered number: 9310187. VAT registration number: GB 991 2809 90 Solicitor’s Regulation Authority (SRA) authorisation number: 621996 Individual Subsidiary Offices DUBAI OFFICE - Gateley UK LLP (DMCC Branch), registered office: One Eleven Edmund Street, Birmingham, B3 2HJ. Registered number: OC315778. VAT registration number: GB 925 0285 36. The business carried on by Gateley UK LLP (DMCC Branch) in Dubai, United Arab Emirates is through its locally registered branch under Professional Licence No. JLT-66866. GATELEY CAPITUS All other offices - Gateley Capitus Limited, registered office: One Eleven, Edmund Street, Birmingham B3 2HJ. Registered number: 3324995. VAT registration number: GB 991 2809 90 Irish office - Gateley Capitus Limited, registered office: 24-26 City Quay, Dublin 2, Ireland, D02 Ny19. Registered number: 908619. VAT registration number: IE 3450656UH. GATELEY HAMER Gateley Hamer Limited, registered office: One Eleven, Edmund Street, Birmingham B3 2HJ. Registered number: 3948095. VAT registration number: GB 991 2809 90 Regulated by the Royal Institution of Chartered Surveyors, KIDDY & PARTNERS Kiddy & Partners Limited, registered office: One Eleven, Edmund Street, Birmingham B3 2HJ. Registered number: 11379755. VAT registration number: GB 991 2809 90 INTERNATIONAL INVESTMENT SERVICES LIMITED International Investment Services Limited, registered office: One Eleven, Edmund Street, Birmingham B3 2HJ. Registered number: 08597472. VAT registration number: GB 991 2809 90 Company Secretary Neil Smith who is also the CFO (Chief Financial Officer). Nominated Adviser (NOMAD) and Broker finnCap 60 New Broad Street London EC2M 1JJ N+1 Singer 1 Bartholomew Lane London EC2N 2AX Financial PR Adviser Belvedere Communications 25 Finsbury Circus London EC2M 7EE Legal Advisers There are none listed but we can probably work out why !!! Auditors Grant Thornton UK LLP The Colmore Building 20 Colmore Circus Birmingham B4 6AT Registrars Link Asset Services 6th Floor 65 Gresham Street London EC2V 7NQ Principal Bankers HSBC Bank plc 6th Floor 120 Edmund Street Birmingham B3 2QZ Lloyds Bank plc 125 Colmore Row Birmingham B3 3SF Annual Reports Annual Reports and Presentations can be found here: https://gateleyplc.com/investors/investor-relations/results-reports/ The most recent Annual Report for Year Ended April 2019 can be found here: https://gat03gateleyplc-live-3ba9dee03d254d0987-a97856d.divio-media.net/filer_public/90/ca/90cafce2-63e7-413e-a91e-6706956e1a17/gateley_annual_report_2019.pdf Directors You can see almost full-body pictures of the Directors here !! (it’s a bit like a bad advert for a Business wear company): https://gateleyplc.com/investors/investor-overview/board-directors/ The following are the main chaps and I have selectively picked out text that I see as most relevant. If you click the ‘VIEW FULL PROFILE’ buttons under each picture you can get more details. Nigel Payne is the Non-Exec Chairman, he was previously the CEO of Sportingbet Plc, one of the world’s largest internet gaming companies, where he made a number of acquisitions whilst listed on the London Stock Exchange (both FTSE-listed and AIM-quoted). He has a degree in Economics and Accounting from Bristol University. He also holds the following positions:
Michael Ward is CEO and Partner, he is based in Birmingham and has over 30 years’ experience as a corporate lawyer, advising private and public companies and private investors. He acts for sellers, buyers and debt or equity providers on corporate transactions, restructurings and shareholder disputes. Michael is regularly involved in contract negotiations, deal origination and deal restructuring. However, Michael Ward is standing down from the CEO role but will stay on as an Executive Director and Major Shareholder in April 2020. On July 10th 2019 an RNS about the ‘CEO Succession’ was issued which you can find here: https://polaris.brighterir.com/public/gateley_plc/news/rns/story/xzqpp7x You can read the full jobbie yourself, but the first paragraph gives the most vital information and overall it looks quite an organised transition: ‘The Board of Gateley, the legal and professional services group, is pleased to announce that Rod Waldie, who is currently the Senior Office Partner of the Manchester office, as well as a key member of the group's management board and head of the national property team, has been chosen to succeed Michael Ward as the new Chief Executive Officer ("CEO"), when Michael stands down from the role on 30 April 2020. After standing down, Michael will remain a main board director and will be responsible for the non-legal businesses within the group. He will also retain a significant shareholding in Gateley for the foreseeable future.’ Neil Smith is Finance Director and Company Secretary, based in Birmingham. He joined Gateley LLP in 2008, was appointed as Finance Director in 2011 and became the first non-lawyer to be appointed as Partner within Gateley LLP following its successful application to become an Alternative Business Structure in January 2014. Neil was a member of the management team on Gateley LLP’s acquisition of the commercial law business from Halliwells LLP in 2010 and, following his involvement in Gateley (Holdings) Plc’s admission to AIM, was appointed to the Plc Board in 2015 and has played a key role in the Group's acquisitions since its admission that have seen the Group expand beyond legal services into a law-led professional services Group. Joanne Lake is a Non-Executive Director, she has an Accountancy background and she is notably a holder of the following positions:
Director’s Pay You can find a link to the most recent Annual Report for Year Ended April 2019 earlier in this Blog and if you go to pages 20 to 25 there is a lot on Remuneration. The Directors seem to have many Incentive Plans and Bonus Plans etc. which might put off many Investors although sadly this kind of thing is quite normal really. The image below shows the Total Remuneration the Directors received for Y/E April 2019:
Director Shareholdings and Major Shareholders
I have taken the image below from SharePad and I did this on Friday 18th October 2019. The 3 Fund Management Groups listed here – Liontrust, Unicorn and Miton are all decent from my experience and a good sign. Bear in mind also that the huge grey bit of the Pie Chart partly includes that 49.4% held by Partners so in practice the Free Float is quite low and this is clear from the choppiness of the Share Price Charts.
Recent Director Dealings
I have taken the following images from SharePad on Friday 18th October 2019 and they should give a good view of recent Director Deals. There are clearly a lot of Director Sells here and not much in the way of Buys. This could partly be down to some Selling after the IPO as it might be their only way reduce their own Personal Risk/Exposure to GTLY and the recent 5 year ‘Lock-in’ Agreement suggests they had a similar limitation that they could only sell 10% of their Holdings each year. If you compare the size of the Sells against the Holdings that the Directors have in the Section above, then mostly these are fairly small Sells in comparative terms.
Recent RNS regarding Partner Shareholdings
This came out on 17th October 2019 and you can read the full RNS here: https://polaris.brighterir.com/public/gateley_plc/news/rns/story/w1okmer Up until June 2020 the Partners have ‘lock-in’ Agreements which were part of the IPO in 2015 and this new Agreement extends for another 5 years. The essence is that for the 5 year period the Partners and their Families can only sell up to 10% of their Holdings from the IPO each year. As it stands this covers 49.4% of the Shares in issue and for other Shareholders this is clearly a useful arrangement because it should prevent heavy selling pressure if a number of the Partners decide to sell large amounts around the same time. There is clearly a Risk here though and this of course could arise as a problem in 5 years time. Calendar I have taken the image below from SharePad and I did this on Friday 18th October 2019:
Here is a page from the Website with the Financial Calendar. There is a Trading Update due in November 2019:
Interesting there are some differences between these Calendars although it is partly explained by SharePad not showing ‘old’ dates.
Recent Trading There was an AGM Statement issued on the 19th September 2019 which you can read here (it’s very short): https://polaris.brighterir.com/public/gateley_plc/news/rns/story/w6nq37r Actually, it is so short, the guts of it are here: “The Board is pleased to report that the good start to the year reported at the time of our full year results in July has continued, with strong trading momentum leaving us well placed at this stage of the current financial year. In July we reported being close to having 1000 employees and I am delighted to say that the headcount has, this month, broken through that number.” Well that sounds OK really. Before that, GTLY issued its Preliminary Results for FY 2019 on the 16th July 2019 which you can find here: https://polaris.brighterir.com/public/gateley_plc/news/rns/story/xpq59mr I will let you peruse those Results at your pleasure, but I have picked out the following bits of text which grabbed my attention: ‘Proposed final dividend of 5.4p per share (2018: 4.8p), representing a full year dividend of 8.0p per share (2018: 7.0p) an increase of 14.3%.’ ‘Robust balance sheet with net assets increased to £30.6m (2018: £23.0m) and net debt of £3.2m (2018: £0.7m).’ ‘Three acquisitions completed and fully integrated in the year: - Strategic acquisition of housebuilder specialists GCL Solicitors in May 2018 - Complementary acquisition of non-legal Human Capital consultancy business, Kiddy & Partners, in July 2018 - Complementary acquisition of non-legal inward investment consultancy business, International Investment Services, in November 2018.’ ‘As announced on 10 July 2019, we are delighted that Rod Waldie has agreed to lead the business when Michael Ward stands down as CEO in April next year. We are also delighted that Michael's commitment to the Group will continue both as an executive director and as a significant shareholder.’ Finally for Part 1…….. That’s it for Part 1 and my focus now needs to divert to working on Part 2 which at present is a bit of a skeleton of headings and not a lot else. At the time of publishing this bit I do not hold Shares in GTLY but from what I have seen so far I am very interested in them and I do expect to be buying unless I discover something whilst doing my Research and Analysis for Part 2 that puts me off. That Part will be more about Numbers and the Accounts etc. so it is where some gremlins could appear although I have not spotted anything too concerning yet apart from things I have already highlighted. I am not in a rush to buy at the moment though with the ongoing Brexit saga and clearly that is another Key Risk that faces GTLY just like it threatens pretty much every other Stock. Until we get more resolution on the political situation I will probably just be tracking GTLY with regards to RNS statements and Chart movements but I might move on a Starter Position at any time. As always if and when I buy GTLY I will make an Entry on the ‘Trades’ page. Regards, WD.
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