SGH - Slater and Gordon

[galumay]

Massive acquisition. Shades of RCG and I expect share price to be north of $8.50 when it re-opens. It's a great PE arbitrage.

Yes, i wouldnt be surprised. I am very pleased to have both RCG & SGH in the SMSF.

I do have some concerns with SGH, the WIP is growing year on year and there may be an impairment for at least some of it at some point, and no doubt it will grow even more with this acquisition but I suspect the market will like it overall.

 

[skc]

I do have some concerns with SGH, the WIP is growing year on year and there may be an impairment for at least some of it at some point

I don't know about this line of thinking. WIP for a law firm is like inventory for a retailer. If the inventory is growing because the retailer is opening more stores... that's just what the business needs to operate as it expands. Yes some inventory will be written off one time or another, but that's just business as usual.

Correct me if I am wrong, but SGH must surely "impair" their WIP regularly as a matter of course? They are "no win no fee" and they can't possibly win them all?!

The risks in this transaction is the due diligence. Are the current portfolio of cases acquired going to generate the required return? SGH has reviewed 8000 cases by 70 lawyers over 6 weeks.... say each lawyer works 55 hours per week, that's less than 3 hours per case. That's probably not enough although there's no reason to suspect that the case portfolio of PSD has deteriorated just in time to be acquired.

 

[galumay]

I don't know about this line of thinking. WIP for a law firm is like inventory for a retailer. If the inventory is growing because the retailer is opening more stores... that's just what the business needs to operate as it expands. Yes some inventory will be written off one time or another, but that's just business as usual.

Correct me if I am wrong, but SGH must surely "impair" their WIP regularly as a matter of course? They are "no win no fee" and they can't possibly win them all?!

The risks in this transaction is the due diligence. Are the current portfolio of cases acquired going to generate the required return? SGH has reviewed 8000 cases by 70 lawyers over 6 weeks.... say each lawyer works 55 hours per week, that's less than 3 hours per case. That's probably not enough although there's no reason to suspect that the case portfolio of PSD has deteriorated just in time to be acquired.

Ok, I have just watched the WIP steadily grow year on year - and its around $500m now - thats a lot of 'inventory'. It has a significant impact on the financials for SGH. Its over half of the assets on the balance sheet.

I see what you mean by impairing it for the lost cases, and i agree that would be happening as a matter of course. I was more concerned about an impairment to wipe the slate clean so to speak.

As far as the due diligence goes, management seem to have done a good job of it to date, but given the problems around Quintrell and the size and complexity, I agree there is certainly risk there.

 

[skc]

Ok, I have just watched the WIP steadily grow year on year - and its around $500m now - thats a lot of 'inventory'. It has a significant impact on the financials for SGH. Its over half of the assets on the balance sheet.

I see what you mean by impairing it for the lost cases, and i agree that would be happening as a matter of course. I was more concerned about an impairment to wipe the slate clean so to speak.

Taking year end numbers ($m) for the last 5 financial years.
WIP = 471, 299, 246, 180, 112
Total assets = 895, 599, 525, 378, 270
WIP/Total assets (%) = 52.6, 49.9. 46.9, 47.6, 41.5

Total revenue = 412, 295, 214, 178, 122
WIP / revenue (%) = 114, 101, 115, 101, 92

On the surface there is no clear trend and the amount of WIP on the balance sheet is simply growing inline with the business.

Yes that item is perfect if management wants to sweep all unprofitable, unwinnable cases into it... but that's would be quite a deceitful thing to do.

 

[galumay]

Taking year end numbers ($m) for the last 5 financial years.
.....

Thanks for taking the effort to dig a little deeper skc, I can see your point about it being proportionly fairly stable.

I guess there is a lesson there about understanding the different types of inputs in financial statements in different sectors - WIP is only a term I have seen in legal company reports and understanding that its a genuine asset line in the balance sheet didnt come naturally to me!

 

[So_Cynical]

2 new shares for every 3 held - i will have to sell some SGH shares in order to fund the new ones.

 

[galumay]

2 new shares for every 3 held - i will have to sell some SGH shares in order to fund the new ones.

Its a tough one, especially as even with the discount its a fair bit more than I paid for my original parcel, so I will end up with a position size that is about double the value of my original position. I guess I will buy the entitlement and then sell down afterwards to resize the holding.

 

[skc]

2 new shares for every 3 held - i will have to sell some SGH shares in order to fund the new ones.

It's an renounceable issue. If you don't take up your rights, it goes into a shortfall bookbuild and you get credited the difference. But best read the documents to make sure.

This will avoid capital gains tax if you don't want to increase your overall holding.

 

[skc]

Massive acquisition. Shades of RCG and I expect share price to be north of $8.50 when it re-opens. It's a great PE arbitrage.

Hmmm... upon reading further, the target has a bit of a checkered past, doesn't it?

May be it won't be as gloriously received as first glance suggests.

Will need to read more and I am keeping an open mind about which way it would trade upon resumption.

 

[skc]

Some info on Quindell.

http://www.telegraph.co.uk/finance/...7867/Quindell-hits-back-at-short-sellers.html

http://gothamcityresearch.com/2014/04/22/quindell-plc-a-country-club-built-on-quicksand/

The quality of due diligence already done by SGH is going to be hugely important...

 

[galumay]

Some info on Quindell.

http://www.telegraph.co.uk/finance/...7867/Quindell-hits-back-at-short-sellers.html

http://gothamcityresearch.com/2014/04/22/quindell-plc-a-country-club-built-on-quicksand/

The quality of due diligence already done by SGH is going to be hugely important...

Thanks, skc, I read the Gotham City stuff earlier, its what led to the huge shorting of the company. No doubt there is a checkered past there, but I guess thats why SGH think they have found value they can unlock. As i said earlier, their due diligence seems to have been up to the job on past acquisitions, I can only hope they have got it right again!

 

[So_Cynical]

I'm inclined to think that the Quindell purchase is a bad deal, unlike all the other acquisitions this one is big enough to really hurt SGH, well hurt the shareholders because they are the ones putting up the bulk of the money, its a risky move simply due to the size.

Its been quite a while since a major Aussie company made a massive blunder buying something foreign so i reckon we are overdue, its like the roll up expansion is more important than the safety of shareholder funds. feels like SGH is taking us to a crap table hoping to win big with our money.

 

[ROE]

I'm inclined to think that the Quindell purchase is a bad deal, unlike all the other acquisitions this one is big enough to really hurt SGH, well hurt the shareholders because they are the ones putting up the bulk of the money, its a risky move simply due to the size.

Its been quite a while since a major Aussie company made a massive blunder buying something foreign so i reckon we are overdue, its like the roll up expansion is more important than the safety of shareholder funds. feels like SGH is taking us to a crap table hoping to win big with our money.

If History is a guide, most ASX listed stock that venture into the UK ending wasting a lot of shareholder money and multi years of under performance

 

[skc]

If History is a guide, most ASX listed stock that venture into the UK ending wasting a lot of shareholder money and multi years of under performance

IAG comes to mind... althought SGH already has a meaningful presence in UK.

I'm inclined to think that the Quindell purchase is a bad deal, unlike all the other acquisitions this one is big enough to really hurt SGH, well hurt the shareholders because they are the ones putting up the bulk of the money, its a risky move simply due to the size.

Its been quite a while since a major Aussie company made a massive blunder buying something foreign so i reckon we are overdue, its like the roll up expansion is more important than the safety of shareholder funds. feels like SGH is taking us to a crap table hoping to win big with our money.

I kind of agree with you and I think your description is a good one. However, reading thru the analyst reports, most are quite positive about the acquisition. They are probably too high and mighty to care about the negative research from Gotham City. Granted that report contain mostly dated information, and had little information on the core PI business being acquired.

The more I research, the more I am repelled by the whole "no win, no fee" business model. It's definitely a breeding ground for dodgy claims, and it drives up the insurance cost for the whole society. Apparently UK is known as the "Whiplash capital of Europe", and everyone from insurers to lawyers are in on this. Shades of VET scamming the Vocation Fee system. And imo, it's not a sustainable or ethical investment proposition.

http://www.telegraph.co.uk/finance/...ritain-is-the-whiplash-capital-of-Europe.html

The fact that SGH has to take a large axe to QPP's internal management accounts to arrive at an adjusted EBITDA is a pretty good red flag. Was the cut sufficient given the due diligence effort? What about some of the major contracts renewal risks? Did QPP do anything dodgy to secure those contracts in the first place?

It will be an interesting day for SGH tomorrow. On one hand, you got major investment house upgrades, EPS uplift, and potential ASX100 inclusion generating demand. On the other hand, you got questionable accouting of QPP, poor historical cash flows as well as the gaze of hedge funds now seeing SGH as a potential new short target.

I am guessing open high and close at the low, but I don't really know how to judge the competing forces listed above.

 

[skc]

Just found a 36 part series on Quindell on Alphaville...

http://ftalphaville.ft.com/2015/03/30/2125246/dear-slater-gordon-shareholders/

 

[McLovin]

Just found a 36 part series on Quindell on Alphaville...

http://ftalphaville.ft.com/2015/03/30/2125246/dear-slater-gordon-shareholders/

I'm working my way through this series...

This one is worth reading and is highlights the biggest risk to Quindell's revenue...

http://ftalphaville.ft.com/2014/07/14/1897222/feeling-the-wip-and-recognising-the-law-at-quindell/


These guys have definitely gone the aggressive accounting route. I hope SGH have done their homework or this could really blow up on them. There's a massive disconnect when Aviva claim an 85% claim rejection rate but Quindell claims a 70% success rate. How on Earth can you grow your case book that quickly while maintaining such an extraordinarily high success rate.

Time will tell I guess.

 

[skc]

I'm working my way through this series...

This one is worth reading and is highlights the biggest risk to Quindell's revenue...

http://ftalphaville.ft.com/2014/07/14/1897222/feeling-the-wip-and-recognising-the-law-at-quindell/


These guys have definitely gone the aggressive accounting route. I hope SGH have done their homework or this could really blow up on them. There's a massive disconnect when Aviva claim an 85% claim rejection rate but Quindell claims a 70% success rate. How on Earth can you grow your case book that quickly while maintaining such an extraordinarily high success rate.

Time will tell I guess.

I think the hearing stuff is sort of taken care of... SGH is essentially paying nothing for them. They have a revenue share model with QPP so SGH will still need to cover the costs to bring cases to settlement. But overall, they didn't acquire anything that has been "aggressively" capitalised from what I can see.

I am more concern about the rest of the stuff. QPP has still not reported FY14 figures (Dec year end). It's saying that, because re-statement will be required, it could be June before the audited accounts are available. SGH is going off internal management accounts and adjusting it to suit its own style... but was it really enough?

As far as I can see, ignoring the adjustments related to NIHL cases, gross profit was adjusted down 18m to 99m (15.4%) while EBITDA was adjusted down 18m to 70m (21%). That is actually quite a high endorsement of the "core" business. Given the alleged management history of QPP, are these adjustments enough?

And indeed, within the core, only 60% of the EBITDA actually relates to professional services. The other "complementary services" are probably a bit outside the scope of SGH's core activities. And there's very little information in the presentation to assess those business lines. The question is whether they actually generate the sort of EBITDA margin being reported?

And then there is the issue of cashflow... which frankly isn't great within SGH to start with. QPP claimed that the cash inflow will start in Q4 2014... but public hasn't seen the report yet.

Meanwhile...the shorts are piling up.



http://www.shortman.com.au/stock?q=SGH

 

[skyQuake]

You have to wonder though what % of shorts are just instos hedging their entitlements. There's at least 10mil shares from the bookbuild taken by new holders, potentially looking to flip it out quick - 14th Apr insto stock comes out.
I have no idea why they use 80% in once sentence, then qualify it with 87% in the next

 

[VSntchr]

Price has failed to continue any ascent since the trading halt as the market digests the acquisition. Bit of a plummet today as the falling market compounds with Bank of America downgrading based on their update which states that SGH overpaid..

http://beta.afr.com/street-talk/merrill-calls-time-on-slater--gordon-following-uk-deal-20150415-1mlchn

 

[bigdog]

The entitlement to new shares at $6.37 on a 2 for 3 basis was looking attractive 10 days ago!
-- closes today

SGH $6.600 $-0.270 -3.93% @ Mon 20 Apr 2015 11:46 AM Sydney time

Any predictions where the SP is heading??
-- looks like down!!
-- reasons ???

Trading after announcement
Date____ Close Volume
17/04/2015 6.87 5,660,554
16/04/2015 7.21 2,894,962
15/04/2015 7.21 4,657,251
14/04/2015 7.57 2,931,260
13/04/2015 7.47 2,143,903
10/04/2015 7.29 2,653,579
09/04/2015 7.27 2,284,967
08/04/2015 7.52 4,704,436
07/04/2015 7.69 3,207,123
02/04/2015 7.85 6,704,969


Trading prior to announcement
Date____ Close Volume
27/03/2015 7.55 1,073,982
26/03/2015 7.6 1,362,012
25/03/2015 7.57 687,196

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