SGH - Slater and Gordon

[craft]

It may be net-net nothing... but it still matters.

I agree because SGH's accounts due to their nature are more then most a matter of faith and where faith is required nothing is more damaging then breaching it.

Not even cash flow is useful to the outside observer due to how subsidiary acquisitions expenses flow entirely through investing cash flow and mismatch with the current revenues purchased that flow through the operating cash flow.

 

[McLovin]

I agree because SGH's accounts due to their nature are more then most a matter of faith and where faith is required nothing is more damaging then breaching it.

Not even cash flow is useful to the outside observer due to how subsidiary acquisitions expenses flow entirely through investing cash flow and mismatch with the current revenues purchased that flow through the operating cash flow.

The method of accounting seems more appropriately suited to a partnership style business, rather than a widely held public company.

 

[craft]

SGH is way to complicated for me to have a firm view on. But its fun to watch and what I really want to watch out for is if it continues to unfold badly will IMF fund a class action

 

[Rainman]

SGH is way to complicated for me to have a firm view on...

I agree with that. For all the lumpiness of its earnings, IMF is a much simpler and more straightforward legal services business than SGH.

 

[skc]

SGH is way to complicated for me to have a firm view on. But its fun to watch and what I really want to watch out for is if it continues to unfold badly will IMF fund a class action

I actually thought SGH can fund a case against itself. It's kind of win-win...

If they win the case, may be their insurer can fit the bill while they get paid the fee.

If they lose the case, well... they proved that all is well.

And they get to increase WIP while they work on the case.

Perfect.

I agree with that. For all the lumpiness of its earnings, IMF is a much simpler and more straightforward legal services business than SGH.

Never really occurred to me before, but SGH is a company of lawyers, while IMF is actually a company of financing law suits.

 

[craft]

I actually thought SGH can fund a case against itself. It's kind of win-win...

If they win the case, may be their insurer can fit the bill while they get paid the fee.

If they lose the case, well... they proved that all is well.

And they get to increase WIP while they work on the case.

Perfect.



Never really occurred to me before, but SGH is a company of lawyers, while IMF is actually a company of financing law suits.

I view IMF more as an investment manager of an alternative asset class then a company of lawyers. Lawyering only really comes into it for case selection. Its a negative art investment manager similar to investing in distressed debt, except in IMF's case the art is in avoiding too many negative case outcomes. Not sure how anybody without a very long term view, high volatility tolerance looking for a high risk/return component to their portfolio gets comfortable holding IMF as an investment - almost impossible to know how the short run pans out unless you are an exceptional legal talent I would think. All that said I do hold and have no legal talent, don't even follow the case outcome updates.

 

[McLovin]

I view IMF more as an investment manager of an alternative asset class then a company of lawyers. Lawyering only really comes into it for case selection.

Yes. If memory serves, the chief of their US portfolio used to actually run a litigation fund for Credit Suisse, but CS shut it down because funding litigation against your clients wasn't great business practise.

Much prefer IMF personally. I only need to make sure their win rate doesn't slip, or they don't start taking outsized bets. Don't have to worry about whether or not they are good at buying companies. Nice cleaner accounts too.

 

[skc]

SGH announcement this morning

Slater and Gordon Limited (Slater and Gordon) advises that on Friday 24 July 2015, United Kingdom time, the claims management services agreement (Agreement) between Swinton Group Limited (Swinton) and its Professional Services Division (PSD) was ended, with effect from midnight on 31 October 2015.

The PSD has been providing first notification of loss services to Swinton, a leading UK insurance broker, and legal and complementary services to not-at-fault Swinton customers since December 2012.

The impact of the end of the Agreement is not expected to be material to FY16 earnings, but Slater and Gordon has elected in the current circumstances, to make this announcement nevertheless.

QPP's announcement when the deal was signed

Quindell Plc (AIM: QPP.L), the provider of sector leading expertise in software, consultancy and technology enabled outsourcing in its key markets, being Insurance, Telecommunications and their related sectors is pleased to announce an extension of a material contract with Swinton, one of the UK’s largest insurance brokers.

Swinton has agreed to extend its relationship with Quindell to 31 March 2015. This extension follows a first year where a significantly improved customer journey was achieved compared to industry norms and to that experienced from previous partners. This contract is material to Quindell’s revenues and one of the largest signed to date.

Swinton is one of the UK’s largest insurance brokers with over 1.2 million auto policy holders and the contract will see Quindell service all aspects of the claims process.

http://www.quindell.com/press-releases/rns/significant-contract-extension-swinton/

Does not compute

 

[VSntchr]

Does not compute

Not material = material.

hmmmmmmm! Maybe they are not trained in statistics and are confusing their p level

 

[skc]

Not material = material.

hmmmmmmm! Maybe they are not trained in statistics and are confusing their p level

I should have mentioned that the QPP announcement was dated Mar 2014.

So one possible explanation is that, it was material back then, but no longer material now.

 

[skc]

Finally... fresh news from SGH. QPP reported last night with vastly restated accounts. A lot of revenue and profits have disappeared, but there isn't a lot of clarity around what SGH took as correct vs what is actually happening. The restated account probably went too far the other way - it's almost at cash accounting so large loss is expected when you start a lot of new cases.

It is entirely possible that, QPP expanded too quickly (or saw the opportunity to write up a lot of revenue and profits by chasing more cases, especially those noise-induced hearing loss ones) and SGH just happened to come in getting all these cases without much outlay while getting a share of the potential proceeds at the back end of the case cycle. However, I wonder if there were adequate quality due diligence on QPP's part in acquiring those cases, so the final outcome is highly uncertain.

Also, it is not clear how the non-NIHL cases are actually going financially... especially cash flows. It seems that the PSD is overall running cashflow negative, even if you take out the cash outlay related to the NIHL cases.

What is certainly bad news, however, is that the SFO (fraud office) is investigating QPP. It's never a good thing to discover that you purchased a $1B asset from a seller under fraud investigation.

SGH share price was very resilient today, considering what assumptions one could make. QPP's share price is down 30% on the AIM at the moment, as investors question the company's ability to return the proceed. Capital return requires court approval, and court approval might be trickier if there's a fraud investigation going on.

SGH's statement today is probably not doing itself a favour if they ever want to chase QPP for any warranty / false representation claims. I guess it's too early to admit they made a mistake.

Some new entries in the Alphaville blog on QPP and SGH.

http://ftalphaville.ft.com/tag/what-is-quindell/

 

[notting]

Quindell is an acquisition machine that has come under attack from the short selling outfit Gotham City Research

Gentleman we're out of our depth. We have to flick the switch -

 

[Ves]

I think the most remarkable thing about this whole saga is that analysts from BoA-Merryl Lynch estimate that Quindell paid roughly 265mil pounds for the firms that it assembled within its PSD, then sold them to SGH within 3 years for almost triple that amount. Mindboggling.

Those FT Alphaville articles are fantastic. It's a pity stuff of that quality is hard to find.

 

[McLovin]

It is entirely possible that, QPP expanded too quickly (or saw the opportunity to write up a lot of revenue and profits by chasing more cases, especially those noise-induced hearing loss ones) and SGH just happened to come in getting all these cases without much outlay while getting a share of the potential proceeds at the back end of the case cycle. However, I wonder if there were adequate quality due diligence on QPP's part in acquiring those cases, so the final outcome is highly uncertain.

Also, it is not clear how the non-NIHL cases are actually going financially... especially cash flows. It seems that the PSD is overall running cashflow negative, even if you take out the cash outlay related to the NIHL cases.

QPP took on 62,000 NIHL cases last year (in 2013 it was 4,000). That is a staggering amount and runs at almost 250/business day. At that rate, I find it very, very hard to believe that they were adequately screening those cases. It would seem you could walk in with an earache and they'd sign you up.

Also worth noting re the adjustments to PSD, they wrote down full year revenue to £220.5m, but revised first half revenue was £183.5m. Full year loss was £99.5m, but H1 loss was £29.9m. I think you can see where I'm going there. Were they fattening the goose for market and now they're unwinding it? I'm still trying to get my head around what it means for SGH.

QPP now has £535m in cash, about £25m in debt and £55m in escrow, and a pretty simple set of accounts with the big accrual business gone. Arguably they're looking much healthier than SGH.

 

[notting]

Setting a new precedent in going from short to long -

In case you missed it, Slater & Gordon shares staged an impressive turnaround yesterday after a heavy early sell-off.

And here's a clue to why.

Slater & Gordon's biggest shareholders appear to have stepped up their war with the company's doubters, pulling stock from prime brokers and creating a potential short-squeeze.

When Slaters opened down 20 per cent at about $2.70 on Thursday - thanks to Quindell's restated accounts - hedge funds were set for a feast day.

Instead, one major shareholder is believed to have pulled its 16 million Slaters shares from the lending pool, representing about one-quarter of the stock available for borrow. [Fingers were pointing at Fidelity International as the owner of the 16 million shares].

All of a sudden, hedge funds were scrambling. Almost all of the supply was out of the market and there was potential for a short squeeze which could undo all of their profits from Slaters' sorry situation.

Good move!

 

[skc]

A very nice house.

http://www.domain.com.au/for-sale/25-barry-street-kew-vic-3101-2012186947?sp=0

 

[skc]

Any thoughts on the SGH report? Very complicated to me...

A couple more posts from FT's long running series on Quindell.

http://ftalphaville.ft.com/2015/08/...n-complicated-indebted-and-yet-to-be-audited/

 

[Ves]

Any thoughts on the SGH report? Very complicated to me...

A couple more posts from FT's long running series on Quindell.

http://ftalphaville.ft.com/2015/08/...n-complicated-indebted-and-yet-to-be-audited/

I haven't read the SGH report... probably not much point, as it won't make much sense any way.

But this was a good laugh from the FT Alphaville article.

According to the cash flow statement, the company paid about A$50m in fees related to the A$1.3bn deal, or about 4 per cent of the consideration. They break down as $24m costs involved in the acquisition of businesses, A$9m for origination of loans, and an A$18m cost of raising equity.

Or to put it another way, Slater & Gordon spent more cash than its existing business produces in a year paying people to help with its takeover of a scandal hit UK basket case which, so far, has only lost it more money.

Amazing when you put it like that.

 

[McLovin]

Any thoughts on the SGH report? Very complicated to me...

A couple more posts from FT's long running series on Quindell.

http://ftalphaville.ft.com/2015/08/...n-complicated-indebted-and-yet-to-be-audited/

I haven't read the SGH report... probably not much point, as it won't make much sense any way.

But this was a good laugh from the FT Alphaville article.



Amazing when you put it like that.

I'm glad I'm not the only one who struggled with the accounts. There are so many moving (and changing) parts. The prezzo goes into a tonne more depth tnan previous years, and there restatements and non-GAAP measures thrown around everywhere. The picture that I get from it is that things are going along as planned. Ultimately, this story is about whether or not they've been overstating WIP. The jury is still out on that. Time will tell.

 

[skc]

Ultimately, this story is about whether or not they've been overstating WIP. The jury is still out on that. Time will tell.

Or rather... how much cash can they get out of all the big lines on the balance sheet.

I think the market (or myself anyway) has moved beyond what the ASIC will say. It doesn't matter if ASIC wants SGH to use cash accounting... it won't change what cash will come out of the capitalised items.

There is a potential positive outcome... which I read from one of the comments in the Alphaville blog series. QPP wasn't so much a fraud, but it was under-capitalised and over trading. It madly acquired those NIHL cases and came to a point where it has no resource to finish them off. Meanwhile, SGH comes in, pick up the cases on the cheap and closer to the harvest stage, and poised to reap the rewards.

My problem with this interpretation, is that it would have been great if SGH paid for the QPP WIP / cases at asset value... but in actual fact they paid a good multiple over that. They didn't value the cases on a standalone basis, but they acquired them as a going concern / business. Obviously that has a lot to do with their own ambition to build market leadership in UK.

I must admit though, the story portrayed by the bears is far more interesting and persuasive than the defense put up by the bulls. As you say... time will tell. There is probably little SGH can do to prove the bull case until the cash starts to roll in... around H2 FY16 by their own projection. Until then the share price might move on short term reaction to ASIC or QPP investigations... but a total re-rating is some time away even under the best case scenario.