Failed merger, goodwill and bad debt write-downs push AF Legal to $8m interim loss

A failed merger, a write-down of bad debts and a massive goodwill impairment due to lower revenues in some regions has pushed acquisitive law firm AF Legal Group (ASX: AFL) to an $8.06 million loss for the first half of FY23.

The Sydney-based company’s result suffered a one-off hit of $8.4 million during the half, with the goodwill writedown of $6.57 million accounting for most of the deficit.

AF Legal (formerly known as Australian Family Lawyers), which last year failed to proceed with a planned $11 million merger with GTC Legal Group, has revealed the latest half year would have resulted in a normalised loss of $393,000 had it not been for the writedowns. This compares with a profit of $744,398 for the previous corresponding half year.

“The board acknowledges the disappointing nature of these results but adds that the last four months have seen significant change, and the board and executive team are intent on returning the company to sustainable profitability,” says the AF Legal in the notes accompanying the latest earnings result.

AF Legal’s loss came off the back of a 2.4 per cent increase in revenue to $8.82 million.

As affirmed in its corporate update earlier this month, AF Legal revealed that although the newly acquired Withnalls’ Northern Territory business contributed $1.5 million in additional revenue for the half-year, the remainder of the group suffered a fall in revenue of $1.3 million, with Watts McCray Sydney, AFL Melbourne and AFL Canberra all down.

This led to the company slashing the goodwill value of these divisions, while a further $750,000 writedown was applied to adjustments in debtor provisions and work in progress.

The failed merger with GTC Legal Group accounted for $273,000 of the loss.

Despite the disappointing half-year result, AF Legal remains ‘cautiously optimistic’ for the second half of FY23.

“Whilst calendar 2022 was characterised by a challenging labour market in legal professional services, we do anticipate a more positive recruitment market for legal professionals in calendar 2023 which should limit negative impacts from a shortage of staff,” says the company.

“We have seen signs of this already with a number of new starters having commenced in Q3 FY23.”

Although January is traditionally a quiet period for the group, AFL Legal says activity so far in the third quarter points to ‘an overall lift in revenue across the remainder of H2 FY23’.

“Our most recent office openings in Wollongong, Gold Coast and Bayside Brisbane are showing signs of increased activity which should have a positive impact on our revenue performance,” the company says.

AF Legal sees the current half year as a ‘period of stability’ as the company focuses on a return to profitability and looks to undertake cost cuts across the business.

The failed GTC Legal merger hasn’t deterred AF Legal from growth opportunities.

“Whilst we focus on our existing businesses, we will continue to pursue similar lateral hire branch openings through our partnership model which has shown pleasing results to date and which represents a low-risk growth strategy for us,” says the company.

“We continue to investigate possible acquisition opportunities to grow our revenue base.”