Knight: Long-term, sustainable growth
Listed law firm Keystone needs to deliver double-digital growth if it is to maintain a premium valuation, its broker has said.
In an indication of the different pressures listed firms are under, Shore Capital said the expectation at the moment was that it would only be around 7% for 2024/25.
Keystone Law has regularly been the stand-out performer in our annual analysis of listed legal businesses and in 2024 its share price was up 13% to 574p, although it reached 720p during the year and was still far short of its all-time high of 865p in 2021.
In September, Keystone reported revenue growth for the six months to 31 July as up 8.3% to £47m when compared to the same period in 2023, with adjusted profit before tax rising 7.2% to £6m.
A trading update last week said the fee-share firm “has continued to trade well” during the second half of its financial year.
“Ongoing broad based client demand, together with the additional contribution of those lawyers who have recently joined us, has delivered better than anticipated revenue for the period.
“This, in conjunction with the slower than expected reduction in interest rates means that the board now expects the group to deliver revenue and adjusted profit before tax for FY 2025 slightly ahead of current market expectations.”
Those expectations were revenue of £94m and profit of £11.9m, up 7% and 5% respectively on the annual results for 2023/4. Notably, those results represented increases of 15% and 23% on the year before that.
Keystone also said recruitment activity “remained buoyant”, with 50 new principals joining during the financial year, ending the period with 455 principals and a total of 576 fee earners.
This, of course, does not take into account departures and amounts to a net gain of 23 principals and 27 fee-earners when compared to a year before.
A research note issued on the results by Shore Capital, Keystone’s broker and nominated adviser, said Keystone’s shares have fallen by 20% since the interim results last September, “which outlined modest growth metrics”.
It added: “The shares have derated since interim results and now trade on a FY25 PER [price earnings ratio] of 18.4x, it still trades on a premium valuation, which we believe Keystone needs to justify with double-digit growth. It is unlikely that [the full-year results] will achieve this.”
Keystone’s shares dropped from 540p to 500p in the last week since the update, but have recovered somewhat in the last couple of days to 520p.
James Knight, chief executive of Keystone, has often told Legal Futures over the years that he does not keep a close eye on the share price as a measure of performance.
Speaking last week, he said: “I am delighted with the continued growth and strong financial performance of the business this year. The calibre of the lawyers now joining the business is superb, reflecting the market leading position which Keystone holds.
“By placing quality at the centre of everything we do, we continue to drive long-term, sustainable growth across the business and value creation for all our stakeholders.”
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