Fundamental Insights Of Two Support Services Companies: GTLY and MER

Gateley Plc

Company Overview

Alternative Investment Market-listed Gateley (Holding) Plc (LSE: GTLY) is the United Kingdom-headquartered support services company. It is engaged in offering legal services along with complementary non-legal services. On June-08-2015, shares of the company got listed on the AIM-segment of the London Stock Exchange.

Recent Acquisitions

As on July 30, 2019, the company notified the stock exchange regarding the acquisition of Persona Associates Ltd. The acquired company is the UK’s leading referencing consulting business, advising on several of Britain’s biggest infrastructure and regeneration projects.  The holding group estimates that acquisition will increase earnings immediately.

Persona Associates Ltd. Transaction Details

The holding group acquired Persona Associates for a net cash-free, debt-free normalised working capital basis for a consideration of £250,000, out of which £153,728.80 would be settled through the issuance of 94,312 ordinary shares in the Gateley Plc at a price of GBX 163/share on completion. The company also stated that deferred payment would be payable as of May 01, 2020, which is subject to several conditions being fulfilled primarily related to the on-going operations of the company. 60% of the deferred payment will be paid in cash and the remaining 40% through issuance of new ordinary shares of Gateley Plc.

Financial Highlights: (FY19 –£’000)

(Source: Company filing.)

During the year under review, the company recorded strong growth in revenues, which were up by 20.2% on a Y-o-Y basis. Revenue reported reached to a record high level to £103.5mn from £86.09mn reported in the year-ago period. Mainly driven by 9.5% organic revenue growth in its core area of legal services and 10.7% revenue growth through acquisitions. Adjusted EBITDA in the FY19 surged by 15.7% to £19.1mn from £16.5mn recorded in the previous financial year. Pre-tax profit increased by 8.9% to £15.9mn and Post-tax profit leapt up by 10.6% to £13.0mn respectively, compared to the year-ago period. Basic Earnings Per Share (EPS) during the FY19 stood at 11.83 pence and recorded a growth of 7.3% from 11.03 pence per share recorded in the FY18, however, adjusted fully diluted EPS shot up by 17.8% to 13.15 pence per share respectively over the year-ago period.

The board of directors proposed a final dividend of 5.4pence/share against 4.8 pence/share proposed in the FY18, and this leads to a total dividend of 8.0 pence/share to be paid to the shareholders, which is 14.3% above the total dividend of 7.0pence/share paid in the previous financial year.

The company has a decent cash position and is making a continued investment for the future backed by a robust balance sheet and net assets surging to £30.6mn from £23.0mn in FY18.  Net debt increased to £3.2mn from £0.7mn recorded at the end of FY18.

Operational Highlights

During the financial year 2019, the company achieved record-breaking revenues and added its staff by means of three acquisitions, namely. Housebuilder specialist GCL Solicitors in May 2018, Non-legal Human Capital consultancy business, Kiddy and Partners in July 2018 and recently acquired International Investment Services in November 2018.

Fundamental Ratios- FY19

Despite a decent performance recorded by the company at the top and bottom lines, margins failed to match the past performances, as EBITDA margin for the year under review slumped by 60bps to 17.8%, Operating margin reduced by 190bps to 15.3% and Net Margin softened by 110bps to 12.6% on a Y-o-Y basis. However, the company’s performance was substantially better than the industry average, as Industry average EBITDA margin, Operating margin and the net margin were at 13.9%, 9.2% and 6.7% respectively.

Return on Equity (ROE) during the FY19 plunged substantially to 48.7% from 58.4% recorded in the year-ago period and in terms of liquidity position, current ratio narrowed marginally to 1.80 from 1.86 recorded in the previous financial year.

Market Ratios

At the current trading level, the company’s TTM PE ratio stood at 13.86x whereas industry average TTM PE stood at 36.1x, Price-to-Sales ratio stood at 1.76x as compared to the industry average of 3.73x, Price-to-Cash flow Ratio was at 61.38x whereas the industry average stood at 39.66x, and Price-to-Free Cash Flow ratio stood at 61.38x against the industry average of 37.9x respectively. With respect to market ratios, the Gateley Plc seems to be available at a cheaper valuation in terms of PE ratio and Price-to-Sales ratio whereas it is trading at a higher premium against the peer group companies, from the standpoint of Price-to-Cash Flow and Price-to-Free Cash Flow ratios..

Stock Performance

Gateley Plc’s shares added 0.56% to the previous day’s closing price and were quoting at GBX 160.90 at the time of writing as on August 14, 2019, before the market close. Shares of the company have registered a 52-week high of GBX 177.5 and a 52-week low of GBX 118.4, and at the current trading level, the shares were quoting 9.3% below the 52-week high and 35.8% above the 52-week low price levels respectively. Post ten consecutive days of fall, shares of the company were getting support at the lower Bollinger Band® and are trading higher in the August 14 market session, before the market close.

Mears Group Plc

London Stock Exchange-listed Mears Group Plc (LSE: MER) is a United Kingdom-headquartered holding company with a primary interest in providing a range of outsourced services to the public and private sectors. The company was incorporated in the year 1996, and its shares got listed on June-23-2008 on the main market of the LSE.

Interim Results Update

(Source: Company filing)

On August 13, 2019, the company reported its interim financial results for the six months ended June 30, 2019. During the period under consideration, the group’s revenue recorded a growth of 10% on a Y-o-Y basis. The group’s revenue for the six-month ended June 30, 2019, stood at £480.8mn from £435.3mn recorded in the same period of the previous financial year. This growth was primarily driven by MPS business that was acquired by the company in November 2018.

However, adjusted pre-tax profit during the period under consideration slumped by 10% to £17.1mn from £19.0mn recorded in the year-ago period, and statutory pre-tax profit declined by 3% to £12.5mn on a Y-o-Y basis. Normalised EPS for the H1FY19 plunged by 18% to 12.27p/share from 15.04p/share recorded in the year-ago period. H1FY19 EBITDA plunged to £23.4mn from £42.7mn recorded in the year-ago period.

Despite narrowing profit and declined earnings, the company declared a 3.65p/share interim dividend for the H1FY19, which was 4% above the interim dividend declared in the same period of the previous financial year.

Order book in the first half of 2019 soared by 43% to £3.0bn from £2.1bn reported in the corresponding year-ago period. However, total net debt of the group at the end of the H1FY19 stood at £63.6mn, which was flat compared to the net debt reported at the end of the H1FY18.

However, the board is confident of delivering full-year results in line with expectations, as highlighted in the previously-issued guidance.

Financial Ratios

Trailing twelve months (TTM) gross margin of the company stood at 23.8%, 110bps higher from the comparable Y-o-Y period, but substantially below the industry average gross margin of 40.47%, TTM Operating margin stood at 3.54%, which is well above the industry average TTM Operating margin of negative 7.5% and TTM Net Margin was at 2.7%, whereas the industry average stood at 3.3% respectively.  TTM Return on Equity of the company stood at 11.45% and was in line with the TTM industry average ROE.

Market Ratios

At the current trading level, TTM PE Ratio of the company stood at 11.8x whereas industry average TTM PE stood at 19.18x, Price-to-Sales multiple was at 0.34x against the industry average of 5.46x, and Price-to-Book multiple stood at 1.4x against the industry average of 9.91x. Therefore, the above-discussed market ratios reflect that the stocks of Mears Plc are trading at a cheaper valuation compared to those of the peer group.

Stock Performance

While writing (as on August 14, 2019), before the market close, shares of the Mears Group Plc were quoting 0.8% higher against the previous day’s closing price at GBX 270.0/share. In the past 52-week period, its shares have registered a high of GBX 400.0 and a low of GBX 219.06 respectively. At the current trading level, shares were quoting 32.5% below the 52-week high price level and 23.3% above the 52 weeks low price level respectively. Also, at the current level, the stock was quoting above the 30-day and 20-day simple moving average prices but was slightly below the 10-day simple moving average price level. From the RSI standpoint, the 14-day RSI was hovering in a neutral zone.(Ratio Detail Source: Thomson Reuters)

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