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Stock Of The Day - Slater & Gordon (BUY)

In today’s daily we cover Slater & Gordon limited (SGH).  On 29th May 2015, the company announced that it has successfully completed the UK Legal business Professional Services Division (PSD) acquisition from Quindell. PSD provides a comprehensive platform of businesses, processes and infrastructure that augments the existing UK business of the company, and the management says that is sees significant opportunities to leverage PSD’s strengths. The UK market currently accounts for 44% of the revenue of the company. 


SGH Performance History (Source - Company Reports)

Prior to the acquisition of PSD; Slater & Gordon made two acquisitions in 2015. One was the acquisition of Walker Smith Way, which is a consumer law firm in North Wales and North West England, with approximately 70% of revenue in personal injury. The company has four offices transferring, providing full coverage of North West England and Wales. The forecasted acquired revenue of the company is 10.3 million pounds or AUD 19.1 million. The other company is Leo Abse & Cohen, which is a consumer and specialist, PI firm in Cardiff Wales. Their expertise lies in hearing loss claims and they have a UK Wide practice in it. The annualised revenue of the firm is projected to be 8.4 million pounds or AUD 15.6 million. 


Australian Operations (Source - Company Reports)

 The company’s stated policy in the annual report of 2014 was to establish scale in the United Kingdom by continuing the acquisition program. The company acquired five firms in the UK In the year 2014. There are lots of similarities between the Australian business and the UK business. All the five firms acquired last year, met or exceeded their performance targets and their integration into the Slater and Gordon UK Business is well progressed and onto the track for completion by March 2015. The company has established a stable base in UK and have the people and initiatives in place to make the best of the opportunities that are available in that market.


UK Operations (Source - Company Reports)


Slater and Gordon is now a leading consumer law firm in the UK, with the number one or number two-market share position in most consumer law practice areas. The acquisitions during the last year have added a revenue base of Euro 72.5 million bringing UK Revenues to just under half of the total expected revenue for the group in FY15. Slater and Gordon now has approximately 1,300 employees in the UK up from 425 when it made the initial acquisition of Russell Jones & Waker in 2012. 


UK Business Locations (Source - Company Reports)

By drawing upon the experience of brand development in Australia, the company has seen significant expansion of the Slater and Gordon brand across UK market. Launch of the Slater and Gordon brand through a multifaceted approach which combined advertising, digital marketing, media/PR, sponsorship and business development campaigns delivered 11% prompted and unprompted brand awareness nationally. This results set Slater and Gordon as one of the three best known law firms in the UK and positions it well in its goal of becoming the leading consuming brand across the UK.
 

Market Share (Source - Company Reports)

The company’s unique competitive advantage is its highly developed work process design and technology expertise, and the company will be replicating these strengths in the UK market. A new practice management and client selection system was implemented in UK and the company commenced the application of standard core applications platform.
 
Apart from the UK Business performance, which continues to be in line with expectations, Australian Personal Injury Law (PIL) practice remains resilient. The company continues to invest in the Slater and Gordon brand. The table below show the other highlights of the performance of the company in the first half of FY15. 



First Half 2015 Performance (Source - Company Reports)


Revenue of the company increased from 178.3 million to 245.3 million, which is an increase of 37.6%, over the period of H1FY14 to H1FY15. Over the same period, the EBITDA of the company increased from 41 to 58.5,which is an increase of 42.7%, while the EBITDA margin increased from 23.1% to 23.9%. Normalized NPAT increased to 35.9 million from 24.5 million, over the same period, which is an increase of 46.5%. The company is on track to achieve a group revenue target of A$500 million, normalized EBITDA margin of 23% to 24%, and cash flow from operation as a percentage of NPAT of more than 70% in the year FY15.
 

EBITDA (Source - Company Reports)

Personal Injury law (PIL) and General Law(GL) continue to be the two main business verticals of the company. The Australian Personal Injury law practice continues to grow on a strong and stable EBTDA margin. It provides specialist legal services to people in range of areas including motor vehicles accidents, workers compensation and civil liability law. Most of the work is performed on a No Win – No fee basis where legal fees is paid on successful conclusion of client’s matter. Slater and Gordon entered the UK Market in 2012 and after a series of acquisitions is now a leading personal injury litigation firm with an estimated 5% market share. The company is targeting a core business underlying growth of 8%.
 

SGH Daily Chart (Source - Thomson Reuters)

The General law practice is made up of personal legal services (PLS) and Business and Specialized legal Services (B&SLS). Work is predominantly performed on fixed fee basis. The UK GL practice consists of Business and Specialised Litigation Services, Real Estate, Crime and Regulation, Personal Legal Services and Employment, Reputation and Professional Discipline. Slater and Gordon has the largest family law practice in the UK. Slater and Gordon will be scaling up many of the smaller practices to an optimum profitability level.
 
The company is currently trading at a stock price of $6.25, which is somewhere in between the 52 week high of 8.070 and 52 week low of 4.538. At the current price the company is trading at a Price to Earnings multiple of 17.62 and a dividend yield of 1.37%. Most of the companies in the sector are trading at a P/E ratio of close to 17 or higher.
 
Given the excellent prospect of the acquisitions in UK, we believe that the stock is a buy at the current price of $6.25.