Keystone Law Group (KEYS)

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In March I invested in the challenger law firm Keystone Law. Though performance has only seen a slight upturn with a 6% increase since my investment, I still believe that the AIM stock has a bright future going forward. The company historically has done very well, with a rise of 174% since it first listed on the AIM market back in late 2017 and now has a market cap of £163 million. 

DISRUPTIVE MODEL

Keystone Law as referenced are situated in the legal services sector but offers a different approach to other law firms, using ‘technology and modern working practices’ to disrupt the industry. The firm's business model relies on self-employed lawyers who work from their own offices but are supported by Keystone Law's head office, allowing them to focus on value-adding and revenue-generating legal services. In return, Keystone Law charge 25% on fees generated.
The company is underpinned by solid valuation metrics, with an operating margin of 11% and a return on capital of 53%. This shows that the challenger firm can use cash effectively in its pursuit of growth, which is supported by net cash flow from operating activities which have more than doubled from £1.2 million in 2017 to £3.7 million in 2019. 

RECRUITMENT


A good indication of how effective the business model is currently is highlighted through the staff it has captured, and can subsequently capture going forward. This is increasingly important as one of the key trends facing the UK legal sector is acquiring and keeping quality employees. With lawyers working to a degree on a self-employed basis, Keystone Law needs to offer a value proposition that benefits both parties in order to recruit new lawyers. This can clearly be seen in the firm’s 2018 results, with ‘fee earners’ triple the levels seen in 2012.

The growing number of lawyers will only drive growth as the business model itself has relatively fixed costs meaning that as lawyers, and hence revenue they generate rise so too will the company’s margin. 

FINANCIAL PERFORMANCE

Looking deeper into the financial performance of the business, the company’s revenue for 2018 broke the £42 million mark, up 164% from £16 million in 2014. This is an encouraging trend for the business with revenue generation important in the success of any business. Not only has the business generated revenue it has also converted this into cash which is key to growth investment, with the company reporting a 91% cash conversion ratio for 2018. 
The company is optimistic about delivering future performance with Robin Williams, non-executive chairman, stating that the ‘substantial opportunity’ in the UK legal mid-market combined with the firm’s business model should lead to the firm overcoming UK economic uncertainties to continue to deliver robust results.  
CLIENT LIST
Another area of interest was the already impressive client list on offer, including names such as Pret, Tesco, RBS and Reckitt Benkiser. This is a strong indication that the business is doing something right as it is able to capture such large, high profile clients. This should provide a platform for future growth, along with the reputational value that could capture potential clients going forward.
Though the stock has only been listed on the AIM market for under two years, the financial performance for previous years has looked strong indicating a disruptive business model and solid management. Additionally, the business model nature is highly reliant on expansion through lawyer acquisition so the continuous increase in principals and fee earners is very encouraging. Therefore I believe that the small-cap stock is well-positioned to perform in the future and provide sustained growth to investors.

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