Stock: Slater & Gordon
Stock code: SGH
Share Price: $2.31 (as at close 10/06/11)
P/E Ratio: 11.77 (Sector P/E 12.42)
Market Cap: $345,000,000
Broker Buy Recommendations:
Austock (6th June 2011, share price was $2.20 that day)
Ord Minnett (25th February 2011, share price was $2.30 that day)
Wilson HTM (26th October 2010, share price was $1.82 that day)
Investor Centre: Slater & Gordon
Company news: Slater & Gordon
Chart: Share price over the year to 10/06/2011
With a one year return of 50.98% and a three year return of 76.34%, personal injury and commercial litigation specialist Slater & Gordon has richly rewarded investors when compared to the All Ords index, which is up a mere 2.6% for the year and down 15.36% over the past three years.
The firm wins an estimated 98 per cent of all cases, ranging from its no win no fee personal injury work to class action cases such as the Fincorp class action where Slater & Gordon negitiated a deal worth $29 million for the 5,000 affected investors only last month.
Australia’s first listed legal firm, SGH is a consumer law firm with 75-year history specialising in personal injury, commercial, family and asbestos-related law and has 40 offices Australia-wide.
SGH has legal teams in multiple personal injury practice areas, commercial law & business services, class actions, and superannuation & insurance, to name a few.
SGH’s calling card is its ‘No Win-No Fee’ arrangement with clients, where there is no fee if they lose, but must pay fees and a success fee if they win. With there win/loss percentage sitting at approximately 98%, this is a lucrative earner for the company. The No Win-No Fee arrangement is only available for personal injury law.
Since listing in 2007 SGH has grown through acquiring Trilby Misso, a personal injury litigation firm in Queensland, last August and then the NSW-based personal injury litigation form – Keddies Lawyers – in January this year.
Prior to the Keddies acquisition the company had a leading position in Victoria & Qld, so this latest acquistion puts them into a strong postition Australia-wide. Austock states thta revenue is derived principally from the personal injury practice, which makes up approximately 80% of revenues, which Austock points out is both defensive & scalable. Austock also believes that the company’s brand presence is strong &
underpinned by established referral channels & marketing. ‘Growth opportunities outside of Victoria are strong & well positioned with existing scale and access to capital to drive consolidation,’ says Austock in a recent research note.
Financials & Fundamentals
Financials for SGH for the past three years:
Sales Revenue ($m)
Reported NPAT ($m)
Dividend Yield (%)
Net Profit Margin (%)
Net Debt/Equity (%)
Link to company Earnings Report: Slater & Gordon Limited Full Year Earnings Report – to June 30th, 2010
Michael Heffernan from Austock listed SGH as a buy in last week’s instalment of 18 Share Tips on TheBull, staing that the company ‘continues to progress in a quietly robust manner’. ‘Slater & Gordon represent a superior investment option among small industrial stocks in the current environment,’ says Heffernan. Heffernan doesn’t believe that litigation will be affected by a slowing economy, and has a 12-month price target of $2.90/share, which implies an FY’12 PER of 11.0x EPS. Their DCF is $3.20/share.
‘While we are mindful SGH is trading towards the higher end of its historical PER trading range, we believe there are sustainable reasons for this,’ says Austock in a recent report. According to Austock, these reasons include the acquisitions of Trilby and Keddies, greater liquidity and a larger market cap, a better understanding of the business by the investment community and a solid history of earnings delivery.
Wilson HTM says that the Keddies acquisition fits into SGH’s strategy to grow in the Western Sydney area where it is currently under represented. ‘We maintain a BUY recommendation…SGH is also one of our conviction list stocks.’
Ord Minnett is also bullish on the stock due to its recent acquisitions, although it does underline some risks (see below). ‘SGH have pursued a similar strategy to that which they followed in Queensland, building scale via acquisition of a key player in the target market,’ says Ords. ‘The balance sheet prior to the Keddies acquisition was robust, having been given an injection of capital in June 2010 with the capital raising as part of the Trilby Misso acquisition.’
Ord Minnett states that risks to the outlook for Slater & Gordon come from:
– Regulatory change from Federal or State jurisdictions.
– Adverse decisions in Project Litigation cases and other “self-funded” matters.
– Integration risk as acquisitions continue, and
– Due diligence failing to uncover issues in acquired practices.
With a 98% win ratio and a strong history of earnings growth, the sole listed legal entity on the Australian market appears to be in a solid position to continue rewarding investors. Its growth through acquisition strategy appears to be paying off, and it continues to receive press via high-profile class action wins such as the recent Fincorp case. However as Ord Minnett points out, there is risk associated with the recently acquired practices and the company has some work to do to keep up its win rate, which is a huge drawcard for new cases.
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