In 2007 an Australian personal injury law firm with roots dating back to the 1930’s became the first law firm in the world to go public.  Shares in Slater & Gordon (SGH) went on sale in May 2007, opening at $1.49 per share, closing at $1.17.  Initial investors have seen 160% share price appreciation since then, with shares now trading over $4.00 per share. The Bull covered SGH as a standout stock six months ago when the stock was trading at $2.70. Here is a chart showing Slater & Gordon’s exemplary price performance:

A few months later in August 2007 another Australian firm placed an initial public offering at $0.50 per share.  Integrated Legal Holdings Ltd (IAW) owns a number of law firms throughout Australia operating under the banner Integrated Legal Group.  Prior to the IPO a partner at Integrated Legal claimed the firm had been contacted by 89 small to mid-size law firms to explore merger possibilities.  While that sounded promising, investors have been getting hammered ever since the stock’s opening price of $0.44 per share.  The current share price is around $0.08.  Here is the sad picture:

Legal and regulatory changes in Australia opened the door for this change but the rest of the world has been slow to follow our lead.  Even here in Australia only one additional law firm has gone public – IPO on 15 May 2013 with an opening price of $1.40.  The stock is up about 20% since then, trading around $1.78.  The firm is Shine Corporation (SHJ), another personal injury law firm that’s expanding into other legal areas.  On 23 October Shine announced profit guidance for FY 2014, 21.5% above the current year.  Shine is off to a good start and Slater & Gordon has more than proved law firms can be profitable investments.  So where is the rest of the world on public ownership of law firms?

The United States does not allow public law firms, both through legislative prohibition and ethical conduct standards set by the American Bar Association.  The problem is potential conflict of interest between shareholders and clients of the firm. The UK Legal Services Act (LSA) went into effect in 2011 allowing “alternative business structures” where the public sale of law firm shares would be allowed, but to date there is nothing going on in the UK to rival the performance of Slater & Gordon.

Historically well-run law firms have been very profitable for firm partners.  Therefore, Aussie punters have a unique opportunity to benefit as shareholders and Slater & Gordon stands out as a prime example.  But is it too late to buy Slater and too early to buy Shine Corporation?  What about IAW?  Let’s take a look: 

Company

(Code)

Market Cap

Share Price

52 wk. % Change

Dividend Yield

Forward P/E

2 Year Earnings Growth Forecast

2 Year Dividend Growth

Forecast

5 year Total Shareholder Retirn (Avg Annual Rate)

Slater & Gordon Ltd

(SGH)

$844m

$4.36

+113%

1.6%

(Fully Franked)

14.06

14.3%

13.5%

29%

Shine Corporation

(SHJ)

$236.5m

$1.80

+13%*

1.5%

(Unfranked)

13.80

(Current)

12.4%

21.2%

N/A

ILH Group Ltd

(IAW)

$13.2m

$0.08

-92%

7.6%

(Fully Franked)

8.78

N/A

N/A

-5.6%

 

Slater & Gordon is the largest by market cap and has better than average looking forward numbers despite its  track record.  Total shareholder return for one year is over 100%. 

On 25 October Macquarie reiterated an Outperform recommendation, raising its target price from $3.50 to $3.80.  Slater has made numerous acquisitions and the latest is a UK firm that will expand Slater’s UK presence.  The firm already has 12 offices in the UK as well as 70 in Australia specialising in consumer advocacy.  The firm’s services are expanding beyond its traditional personal injury base.  Slater claims its Family Law practice has grown to be largest in Australia.  The company reported 37% growth in the Personal Legal Services business encompassing  wills, estate planning, conveyancing, criminal law and other areas.  Finally, Slater provides an online “draft your own will” website.  Thomson/First Call reported 3 Strong Buy, 2 Buy, and 1 Underperform ratings for SGH for the previous month.  

Unfortunately the remaining two firms have no analyst coverage.  However, a comparison of the numbers in our table shows Shine Corporation (SHJ) compares favorably with Slater & Gordon, albeit with little history.  The first table is limited to share price, dividend yield, and forward looking measures.  Our second table looks at some existing measures of fundamental performance, including Return on Equity and Profit and Operating Margins.

Company Code

Gearing

Return on Equity

Net Profit after Tax

Profit Margin

Operating Margin

SGH

14.9%

12%

$41.9M

14.1%

24.5%

SHJ

18.7%

17%

$17.5M

16.6%

26.3%

IAW

45.1%

5.1%

$1m

3.2%

7.7%

 

Once again, the Shine Corporation compares favorably with Slater & Gordon, but can the firm deliver over time?  Shine currently has 40 offices in Australia.  Shine intends to expand its practice beyond personal injury into areas such as environmental law, class action suits, land owner rights, and professional negligence.   

Its expansion is focused on additional litigation of damage claims through product liability, professional negligence, class actions, aviation, asbestos, human rights, environmental claims, landowner rights, superannuation, and disability insurance cases.   While Shine might be added to the watch list, Slater & Gordon is already ranked number nine in the 2011/2012 list of Australia’s top 35 law firms.

On paper Integrated Legal Holdings Limited (IAW) looks like a winner.  Member firms offer legal services and an IAW subsidiary offers online legal services tantamount to a “virtual” law office, which neither SGH nor SHJ do.  IAW has offices in Sydney, Perth, Melbourne, and Brisbane along with other offices and affiliates in 15 Pacific Rim countries, with a key representative office in Singapore.

In practice, IAW may be a victim of poor branding.  Slater & Gordon and to a lesser extent Shine Lawyers are recognised legal brands.  Integrated Legal Holdings has since its inception pursued an acquisition strategy allowing member firms a high degree of autonomy.  The resultant multiple brand names, independent websites, and varying marketing strategies may have hurt the holding company’s efforts to achieve synergistic results through collaboration.

That may be about to change as the latest round of acquisitions and mergers of two independent IAW subsidiary firms will result in what could be a recognisable brand – Rockwell Olivier.  Watch for it.  In addition, Integrated has added non-legal wealth management and business advisory firms to its stable.  Once Rockwell Olivier becomes fully operational in Q1 of 2014, Integrated will have four business segments in place.  The legal services segment will consist of Rockwell Olivier along with the Pacific Legal Network; a corporate advisory segment consisting of Eaton Capital Partners; a wealth management segment consisting of Capricorn Investment Partners and the Pentad group; and finally online legal services through Law Central.  

Law Central is the segment that could truly make IAW a real turnaround story.  Law Central is basically an information technology platform that goes far beyond the internet legal sites that allow you to print your own forms.  The platform is interactive and essentially allows clients to create their own unique documents via their own online input which is then turned into legal documents for review by a live lawyer.  The Wall Street Journal Legal Blog awhile back ran a post predicting the demise of the traditional law firm.  The future, they claim, belongs to independent freelance lawyers and to “virtual” law offices.    

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