Pain before the gain – Fairpoint warns of lower legal services revenues before 2018 rebound

Profits: ups and downs for Fairpoint

Fairpoint Group plc – the AIM-listed business that has bought four law firms – today told investors that they would not see the benefits of its restructuring until 2018 as it warned that performance this year will drop.

Its revenue from legal services revenues jumped 32% to £41.8m as a result of the full-year benefit of the Colemans acquisition in August 2015 – putting it around 70th in the list of the country’s law firms by revenue – but they are likely to dip 15% this year.

The growth of the legal services division in 2016 was offset by the anticipated halving of revenues in the debt solutions division to £11.1m.

Fairpoint said the simplification of the group to focus on legal services, “as well as the cost benefit of the restructuring”, should lead to an improved trading performance from next year.

The company previously told the stock exchange that its 2016 results would be “materially below” market expectations as well in the wake of a profits warning and its chief executive departing; there will be no dividend announced for 2016. Its share price has crashed over the past year from around 160p to 16p.

In a trading update today ahead of the full results being published at the end of April, Fairpoint said its 2016 performance was “broadly in line with revised expectations”, with the overall revenue of £52.9m down from £54.1m in 2015, and adjusted profit before tax more than halved from £10.5m to £4.9m.

The company expects a statutory loss “due to exceptional costs and impairment provisions”.

Net debt at the end of 2016 was £19.9m, up from £13.6m, after £3.2m of acquisition-related payments.

Fairpoint specialised in debt management before buying Simpson Millar in June 2014, since when it has bought niche family firm Foster & Partners, Manchester practice Colemans-ctts, and south Manchester firm Abney Garsden, best known for acting for victims of child abuse.

Fairpoint said it expected legal services revenues to fall around 15% this year. “This reflects a reduction in the number of cases settling for value in 2017 and predominantly relates to complex personal injury cases which can take in excess of four years from inception to be closed for value.

“The performance of legal services is then expected to improve from 2018 as a result of a combination of the current case load reaching maturity and an increase in the level of marketing spend to drive new business. Debt solutions revenues will also decline as the group reduces its activities in this sector.”

It said the government’s personal injury reforms should affect only 4% of its caseload.

David Broadbent, who has stepped up from chief financial officer to become Fairpoint’s new chief executive, said: “Significant work has been performed over the last three months to better understand the maturity of the legal case load, improve the visibility of results, and to deliver cost savings primarily within debt solutions and group overheads.

“As a consequence, we expect 2017 will be a year of transition with significantly lower revenues in legal services coupled with a further contraction in revenues from debt solutions.

“However, we expect, in 2018, to benefit from an improvement in legal services revenues combined with the full realisation of the cost savings currently being made which should deliver a much improved trading performance.”

City solicitor David Harrel, who became temporary executive chairman last month, has resumed his role as non-executive chairman.

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