Terminated acquisitions, senior resignations and a plummeting share price—family lawyers AF Legal (ASX: AFL) have had quite an edge-of-the-seat first half of FY23. Even as divorces boomed during the pandemic and after, the Company was focused on saving its marriage within. And now, after what we’re assuming was an intense couple’s counselling, it vows transparency.
The Company reported an H1 FY23 unaudited revenue (excluding Disbursements) of $8.8 million, up by $200k on H2 FY22. Its January 2022 acquisition, Withnalls’ Northern Territory, comprised $1.5 million of the uptick. Besides this, the Company witnessed a revenue downfall of $1.3 million, as its subsidiaries Watts McCray Sydney, AFL Melbourne and AFL Canberra declined in value. Over the past six months, AF Legal’s share price, too, has fallen from $0.39 per share on August 8 to last close at $0.125 per share.
How did it get here? The reasons are multifold. For one, its lack of accuracy and/or transparency in its annual report. It incorrectly stated the salaries of two of its topmost officials: Kevin Lynch and Pratyush Jagdishwala, raising alarm bells. Moreover, the Company noted that it dealt with one of the tightest labour markets in three decades.
It faced several challenges, with the most impact being the ongoing effects of a reduction in the number of revenue-producing lawyers in 2022, i.e. the resignations of its top staff, including former executive director Grant Dearlove. These departures were exacerbated, given the difficulty in recruiting these lawyers. Apparently, quality Family Law professionals were hard to find in 2022.
Moving into 2023, the Company hopes to set up a new team, with several senior lawyers commencing employment in Q3 FY23. It is already witnessing an increase in productivity and revenue for Watts McCray in January and a strong performance in file openings across the first five weeks of 2023. Still, the Company remains cautiously optimistic that improving revenue trends evident from late Q2 FY23 will continue across H2 FY23.
It was so intertwined in its internal drama that, for the first time in its history, AF Legal did not undertake an acquisition in 2022. For instance, its merger agreement with GTC Legal group was terminated following its annual report fiasco.
Several one-off expenses and charges also adversely impacted the Company’s results, like those associated with GTC and older items.
The combination of the FY23 half-year results and general revenue downturn across regions has necessitated a review of the carrying value of Goodwill. This review has yet to be finalised and might be subject to the ongoing half-year audit review. It must include an impairment charge of $6.6 million in the FY23 half-year results.
This would result in a statutory loss for the half year in a range of $8.4 – $8.9 million. Without the one-off charges or goodwill expenses, the Company expects to record a loss of $500k.
After its dirty laundry was aired publicly, the Company is aiming for greater transparency. It will provide investors detailed quarterly updates in May and November (AGM) each year. AF Legal will prioritise stability and a return to profits, and a strong pipeline of organic and inorganic growth opportunities.
It has locked in Chris McFadden as the permanent Chief Financial Officer and is set to steer AFL in a new direction.
Alinda is a Business Reporter for The Sentiment
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