11 October 2017

Blog: Gordon Dadds Group – Legal Ease

Scott Fulton | 11th October 2017

Today Capital Access Group publishes investment commentary on its latest client, Gordon Dadds Group (GOR.L). The company listed on AIM in August 2017, raising £18.8m at 140p. The funds were used to acquire Gordon Dadds LLP, a full-service law firm, which forms the basis of the listed entity.

Gordon Dadds raison d’être is to deploy an innovative operational structure across the legal services industry, recruiting individual professionals and acquiring small to middle ranked firms. The structure itself is like that employed by disruptive services providers in other industries; providing critical back-office support to fee earners who can focus on client work, client acquisition and cross-selling. In return, fee earners gain a higher proportion of income from their work than in traditional law firms and do not have to provide substantial amounts of capital to do so.

Through this structure, Gordon Dadds is intent on building a legal services business which can compete in the emerging market in England and Wales, created by the introduction of Alternative Business Structures (ABS) within the Legal Services Act 2007. This market has seen the introduction of non-legal competition (notably from accounting firms), greater pressure on fees for those outside the largest practices and cost challenges presented by high gearing and insurance requirements. The Gordon Dadds model provides a “capital-light”, cost efficient basis with which to address these pressures and challenges.

The company is targeting two main sub-segments within the industry; the “challenged” middle and smaller firms. These segments are determined by their fee revenue. The former typically generates c. £19.0m per annum while the latter tends towards £10.0m or less. In total, the company estimates that these definitions cover almost 4,000 individual firms, providing a market opportunity for the company of c. £6.0bn per annum in fees.

Gordon Dadds’ growth in the last three years has been impressive as it has integrated a series of acquisitions and “lateral hires” (partners joining the firm). In our initial forecast model, we expect this growth to continue with CAGR in earnings of c. 30.0% between 2017 and 2020. The key to this growth is the operational gearing lent the company by its economic model. Higher numbers of fee earners can be supported by the current back office while new acquisitions tend to be immediately accretive as costs are reduced quickly.

The company has few quoted peers and no immediate comparators on a valuation basis. To derive a theoretical value, we have used a 10-year discounted cash flow model. Within this, we have used a higher than average discount rate (12.5% compared to a current cost of equity of 8.5%) and a lower terminal value growth rate (0.5%). Despite these constraints, our analysis suggests a theoretical Net Present Value of 340p or 138.0% upside from the current level.

A copy of our full report can be found here.

Gordon Dadds’ management is keen to meet interested investors. If you would like to meet the management team please contact Capital Access Group on 020 3763 3400.