Venture: UK Services

Issue 28;

Gateley Holdings (GTLY UK)

“From our legal foundations, we have sought to bring in new business lines, and business models, that complement and add to the suite of services that we offer to our increasingly diverse clients. With over 1,500 people across 20 UK locations, Gateley is a professional services group which has differentiated itself by making selective investments in, and growing, quality legal and consultancy services on each of our four Platforms, aimed at our core markets of Business Services, Corporate, People, and Property.”

Originally a Victorian legal partnership, modern GTLY came to be in the 1970s in Birmingham when two legal firms merged. They floated in 2015, the first law firm to do so in the UK and have made 15 acquisitions since. Since the IPO, the strategy has been to build a professional services group, beyond just legal, of “scale and breadth”.

Thanks to the Keyworks Studios (KWS) bid, there seems to have been a change of heart regarding acquisitive companies, also seen by the recent strength in Team Internet (TIG). Don’t be surprised that this note is in a similar style to the KWS note.

GTLY has increased its share count by 31% in a decade and has 15 acquisitions to show for it. The share price was supportive of this strategy until 2021. The new shares funded acquisitions and incentivised staff.

GTLY Shares Outstanding

The acquisitions have fed through into higher sales and profits. The company trades on a forward PE of 8x, never seen before.

GTLY Sales and Profits

The asset base has been rising in absolute terms and on a per share basis, which demonstrates their acquisition strategy has been both disciplined and accretive.

GTLY Book Value per Share

Yet despite creating value, the EV/Sales also trades cheaply while sales are still growing. The historical growth rate has been around 12% and has slipped slightly but is forecast to rebound.

GTLY Enterprise Value and Sales

The recent trading statement was upbeat, confirming expectations. The shares have started to bounce after a 67% fall. Having looked closely, the correction is heavily overdone and is wrapped up in the 2021 mall cap bubble. That is behind us, and the shares are significantly undervalued.

GTLY Share Price

Rod Waldie, CEO and a real estate lawyer, said:

“This positions us well as we enter FY 25. The Group continues to benefit from the resilience created by our strategy of investing in an increasingly diverse but complementary range of professional services. Our strong balance sheet also provides a solid foundation from which to take a long-term view of potential growth opportunities, as well as providing the bandwidth to deliver a strong dividend yield for our shareholders.”

That dividend yield is 7.5% and covered by cashflow, leaving little left over, but the company doesn’t need it. Three analysts reiterated their forecasts last week, with a consensus price target of 214p. The other two analysts have not updated for several months. The implied upside is 70%.

The CEO and his management team have done a good job, and he strikes me as a natural leader and motivator. Their presentations come across well.

This is another favourite of Liontrust Asset Management, who have recently suffered outflows from their smaller companies’ fund, bringing some of their large holdings with them. The stock is widely held, by small cap managers and company employees.

Risk

The shares trade around £175k per day, which is low for a large position, with a modest volatility of 25%. The business is diversified and has a strong balance sheet, and an attractive valuation. I deem this to be medium to high risk.

Venture Update

Team Internet Group (TIG) has rallied on good results and further upgrades.

Note: Prices are recorded at the time of recommendation.

Please let me know your thoughts by emailing me at charlie.morris@bytetree.com or tweeting me @AtlasPulse.

Many thanks,

Charlie Morris

Editor, Venture