Traditional lawyers are sniffy about listed law firms. Having put in the hours to climb the pole towards partnership, many look down on their public rivals as greedy and publicity obsessed.
The predicted rush of floats in the aftermath of 2011’s relaxation of rules on law firms’ structures hasn’t sprung forth. Mishcon de Reya mulled, then pulled, plans to float; so did Irwin Mitchell. And some of those that did list foundered. DWF returned to private hands; Ince Group collapsed; and over the past five years, Gateley has lost a fifth of its value, while Knights’s share price has halved.
Against this backdrop, Keystone Law stands out. It’s an entrepreneurial set-up: about 500 self-employed lawyers introduce 98 per cent of clients to the business, and have access to a handful of central offices for client meetings. Its IT platform, meanwhile, is a back-office hub; and there’s a modest bank of admin and junior lawyer staff. Its shares are up 18 per cent this year, trading at 620p. Investors who dipped in when I tipped the stock 14 months ago at 507p will be in the money. Yet, ahead of Keystone’s full-year results on Thursday, the stock looks to have a long way to go.
This is partly due to the legal industry’s own pace of change. With artificial intelligence making inroads in contract law, even large corporates no longer blindly view massive legal bills as a normal cost of doing business. Keystone, with its cheaper rates and growing brand, will capitalise.
Meanwhile, its costs are declining. The legal sector spent last year grappling with a recruitment crisis in commercial law, and a resultant salary price war. That’s now settling: at its last trading update, Keystone said it had signed up 51 new lawyers in the year to February, giving it 432 principals and 549 fee-earners. That larger cohort means the firm can take on more cases, raising profits. Average fees earned by each lawyer are also up, by about 6 per cent — accelerating revenue growth.
The City has pencilled in revenues of £86 million for 2024 — a rise of 14 per cent in a year.
As fee-earners at Keystone retain more of what they bill clients, more experienced lawyers are being drawn to its model. As a result, said Alasdair Young at the investment bank Panmure Gordon, Keystone is securing higher-calibre lawyers, with “more joiners from ‘top’ firms due to increasing brand awareness”.
Analysts expect pre-tax profits to exceed £11 million for 2024, up from £9.2 million last year. Keystone is changing hands at a price-earnings ratio of 19, 38 per cent lower than its five-year average, and it has almost £8 million in cash and a progressive dividend policy (a 12.5p special dividend was paid out to investors last year).
The numbers may still be small but Keystone’s highly cash-generative business model is shaking up a fusty industry. It’s an eminently scalable platform with minimal capital demands, and still good value. Buy.
