SGH - Slater and Gordon

[So_Cynical]

You didn't get screwed. Should have taken up the offer like i did!

So we both got screwed. point was/is that the only ones that didn't get screwed were the board members who sold all or some of their entitlements at $1.31

 

[galumay]

So we both got screwed. point was/is that the only ones that didn't get screwed were the board members who sold all or some of their entitlements at $1.31

Sorry if I came across as a bit harsh there!

I think we got a bit off track there, my point was that I doubt that a change in management will make much material difference. The "screwing" we got was par for the course with big business in this country (everywhere probably). You get down with the dogs, you get fleas!

Just be glad you weren't cleaned out by the capitalists involved in the Dick Smith 'scam', makes SGH look benign in comparison!

Dick Smith scam

 

[Ariyahn2011]

I took a position at 2.60

will do 1 more buy, if it drops more than 50%.

Cheers

 

[McLovin]

Guidance was reaffirmed although it will be weighted toward the second half. What was guidance? It was EBITDAW $205m and OCF/EBITDAW 100%.

There is this from the CEO...



That will lower EBITDA because of changes in WIP but improve OCF as that WIP is liquidated. Call me cynical, but because SGH have guidance that excludes WIP (ie EBITDAW) this won't flow through to that number, but the positive affect on OCF will, to the tune of about $42m at today's fx rate.

The positive side of this is that they do appear to be trying to rein in working capital.

I think the selloff today probably has more to do with the negative OCF forecast in the first period, and the heavier weighting toward the second half.

 

[galumay]

I think the selloff today probably has more to do with the negative OCF forecast in the first period, and the heavier weighting toward the second half.

Agreed, a classic mis-pricing opportunity. I would be in like Flynn if I had some spare capital looking for a home! Already have a fair parcel and don't have anything I want to swap capital out of at the moment.

 

[Ves]

I think the selloff today probably has more to do with the negative OCF forecast in the first period, and the heavier weighting toward the second half.

I dunno, do ASIC always have to approve a new auditor? If so, you'd have thought it'd be fairly straight forward and you wouldn't need to mention it at your AGM...

The AGM speeches didn't really say much at all. They were pretty wishy-washy and effectively just kicked the can down the road, and on top of that surprised with the negative cash flow comment.

Didn't the CEO / Chair (can't remember which) recently do an interview with the Australian newspaper full of fighting words about the doubters?

Today's tone was completely different.

Very confusing and plenty of fuel for the doubters.

 

[McLovin]

I dunno, do ASIC always have to approve a new auditor? If so, you'd have thought it'd be fairly straight forward and you wouldn't need to mention it at your AGM...

ASIC doesn't approve new auditors but it does approve resignations of auditors, which is what the company said it was awaiting. I guess it's done to stop opinion shopping. I don't know what the process is, but I would assume it's more than just a rubber stamping, and will probably coincide with the finalisation of the investigation by ASIC. Like all good lawyers they made a qualified comment "we have new auditor, subject to ASIC approving the resignation of our other auditor".

The AGM speeches didn't really say much at all. They were pretty wishy-washy and effectively just kicked the can down the road, and on top of that surprised with the negative cash flow comment.

Didn't the CEO / Chair (can't remember which) recently do an interview with the Australian newspaper full of fighting words about the doubters?

Today's tone was completely different.

Very confusing and plenty of fuel for the doubters.

I actually thought they sounded pretty upbeat. The OCF thing is a big issue for these guys, and to be honest until there is money coming in the door, not from liquidating WIP, but actual repeat business the lack of cash flow will continue to work the SP over. I think the lack of having anything "big" to say reflects where the business is. They'll either be superstars in 18 months or they won't be around. I'm inclined to think it's the former, but haven't put any money on the table.

 

[skc]

Guidance was reaffirmed although it will be weighted toward the second half. What was guidance? It was EBITDAW $205m and OCF/EBITDAW 100%.

There is this from the CEO...

View attachment 65053

That will lower EBITDA because of changes in WIP but improve OCF as that WIP is liquidated. Call me cynical, but because SGH have guidance that excludes WIP (ie EBITDAW) this won't flow through to that number, but the positive affect on OCF will, to the tune of about $42m at today's fx rate.

Hmmm... Interesting take. But does a reduction in WIP growth naturally translate to improved net cashflow? The cash outflow is mostly staff cost... if you take in less new cases, doesn't it just mean the staff is less busy? Unless you reduce your headcount, or there are true variable costs (like paying a referring agents on a per case basis), reducing WIP may not automatically translate to improvement in cashflows.

In this instance... re-affirming guidance really means very little when the management changes the forecast in the most sensitive area (i.e. cashflow). It's like saying... "Yes trust us with out guidance - we are good at forecasting. In other news, H1 cashflow was much lower than what we forecasted". But H2 will be good!.

Their gearing at the end of H1 won't be pretty... and I bet you they are the most geared law firm in the world (public or private). The analysts will take an axe to the reported EPS etc and there'd be a round of price target cuts tonight.

May be QPP can use all that cash from SGH's acquisition and buy SGH back... that would be pretty funny.

Agreed, a classic mis-pricing opportunity. I would be in like Flynn if I had some spare capital looking for a home! Already have a fair parcel and don't have anything I want to swap capital out of at the moment.

Definitely a classic mis-pricing. They hid the H1 negative cashflow somewhere in the presentations that was marked non-price sensitive. It was a no brainer short above $3, especially given how they have ran pretty hard leading into the AGM.

 

[Ves]

ASIC doesn't approve new auditors but it does approve resignations of auditors, which is what the company said it was awaiting. I guess it's done to stop opinion shopping. I don't know what the process is, but I would assume it's more than just a rubber stamping, and will probably coincide with the finalisation of the investigation by ASIC. Like all good lawyers they made a qualified comment "we have new auditor, subject to ASIC approving the resignation of our other auditor".

Thanks for the clarification mate. Still seems like strange comment. I guess they just wanted to say something to tell shareholders that they are working closely with ASIC to fix any existing problems. It just didn't sound very convincing to me.

It's interesting in your further comments that you said:

They'll either be superstars in 18 months or they won't be around. I'm inclined to think it's the former, but haven't put any money on the table.

Which makes it sound like a very binary situation. I think they'll just muddle through to be honest, but I don't see how they are going to earn extraordinary ROIC in the long-term (and not convinced they are now, but it's hard to tell considering the lack of transparency in the accounting methods). In which case, it'll trade much closer to book value.

 

[McLovin]

Hmmm... Interesting take. But does a reduction in WIP growth naturally translate to improved net cashflow? The cash outflow is mostly staff cost... if you take in less new cases, doesn't it just mean the staff is less busy? Unless you reduce your headcount, or there are true variable costs (like paying a referring agents on a per case basis), reducing WIP may not automatically translate to improvement in cashflows.

Yeah you're right. I keep thinking of WIP as inventory. Unload a bit, release cash.

Fryday.

 

[notting]

May be QPP can use all that cash from SGH's acquisition and buy SGH back... that would be pretty funny.

Reminds me of Kerry Packer selling Nine to Alan Bond and buying it back a few years later. Saw that toad coming from miles away.

Some of these legal firms pay their staff a retainer and rewards for cases taken and won, so staff costs can be a little deceptive. Regardless of that, it looks like a fricken basket case to me and when they start blaming short sellers, well that's really getting desperate to divert blame for your mess.

At the AGM people were calling for them to sue the fund-managers shorting them. SGH should take a look at the Church of Scientology model. Legally harass the neigh neigh-sayers. Quite the model - The Church of Scientology - vertically integrated!

 

[McLovin]

Which makes it sound like a very binary situation. I think they'll just muddle through to be honest, but I don't see how they are going to earn extraordinary ROIC in the long-term (and not convinced they are now, but it's hard to tell considering the lack of transparency in the accounting methods). In which case, it'll trade much closer to book value.

I dunno, their debt load makes it kind of hard to just muddle along. The funny thing is that this is actually a pretty simple business. John gets hit by Joe, has $x in medical fees and missed work, threatens to sue Joe's insurer, insurer pays up, before it goes near a courtroom. I'm sure the case law is well established and all parties know what the likely outcome is before they start negotiating. The number of cases in the pool and the relative simplicity of the cases involved tells me that they really should do well. I'm sure large parts of the client screen could/are be/en automated even. Unlike say IMF where there are far fewer cases in the pool, each case is far more complex and requires a much larger investment. This isn't heavy duty contract litigation, or Mabo, or even the vibe. It's neck braces and cheap-suited ambulance chasers.

 

[Ves]

The funny thing is that this is actually a pretty simple business.

Completely agree. But, there-in lies the problem, every other law firm knows that, and from what I can tell there's pretty fierce competition for the easy cases.

Yep, they could automate it, but I'm fairly sure if the technology exists or the systems exist in any form, it wouldn't be that hard for someone else to replicate it.

I wouldn't be surprised if this industry was going the same way as tax accounting given the well established processes. All of the money is in consulting / advice, and the run of the mill processing stuff has started more and more to become like a sausage mill.... Xero, MYOB etc. and their whizz bang automated accounting data feeds have made it so much easier than the days of manual line by line processing. It's now low-cost, low margin, fiercely competitive as the staff costs get lower and lower and lower.

What's a brand worth any way? Does Joe Bloggs really know if he would have got a quicker or bigger claim at the firm up the road? As long as he is successful I'm sure he'd never notice. You can play sombre / inspiring / tragic music on TV ads all day, but does anyone really know the difference between Maurice Blackburn and S&G or the local firm making an occasional appearance?

 

[Valued]

What do you expect them to automate exactly?

I have a very intricate understanding of exactly how their business works by the way, so prepare to be ripped to pieces on any silly answers:

 

[McLovin]

Completely agree. But, there-in lies the problem, every other law firm knows that, and from what I can tell there's pretty fierce competition for the easy cases.

Yep, they could automate it, but I'm fairly sure if the technology exists or the systems exist in any form, it wouldn't be that hard for someone else to replicate it.

I wouldn't be surprised if this industry was going the same way as tax accounting given the well established processes. All of the money is in consulting / advice, and the run of the mill processing stuff has started more and more to become like a sausage mill.... Xero, MYOB etc. and their whizz bang automated accounting data feeds have made it so much easier than the days of manual line by line processing. It's now low-cost, low margin, fiercely competitive as the staff costs get lower and lower and lower.

What's a brand worth any way? Does Joe Bloggs really know if he would have got a quicker or bigger claim at the firm up the road? As long as he is successful I'm sure he'd never notice. You can play sombre / inspiring / tragic music on TV ads all day, but does anyone really know the difference between Maurice Blackburn and S&G or the local firm making an occasional appearance?

I see where you're coming from re muddling along now, Ves. I agree with what you're saying. FWIW I don't think this is an outstanding business, and when I said they'll be superstars, I meant SP wise. The central case for SGH is that investors believe they are inflating or over estimating what they will collect. I find that difficult to believe of the reasons I gave in my last post. I'm not willing to put money on it because I just don't think I'm right.

What do you expect them to automate exactly?

Surely first level screening of potential cases could be run through a question answer type thing that spits out a proceed don't proceed, before the injured punter even meets Mr Hutz? Rip away. If you know how these things work, I'd actually be very interested in understanding.

 

[Valued]

Surely first level screening of potential cases could be run through a question answer type thing that spits out a proceed don't proceed, before the injured punter even meets Mr Hutz? Rip away. If you know how these things work, I'd actually be very interested in understanding.

It would be hard to exclude cases unless it was very clear. All firms will have a questionnaire to start off with. Some clients because of their injuries or background won't be able to read/write or understand the form. The questions have to be very basic and just ask things like the date of the injury and what happened. A computer won't be able to say whether there is a case or not, they would be screened by a person. In terms of excluding a case based on questions, I don't see how you could do that. You could have a question like "When did the injury occur?" and if it was over statutory limitation the firm could reject it but they could lose work because sometimes the limitation can be extended and you can still settle out of time cases. There are also exceptions such as being under a legal disability and then clients won't know what constitutes a legal disability without legal advice. If they are excluded because the automated process tells them they were not under a legal disability when they were then the firm could potentially be exposed to liability. Examples of a legal disability are being a minor, being in prison or not being of sound mind.

The only way to know if someone has a case is to get a medico-legal report. The client is made to pay for it. The firm has to collect information from the client and send a letter of instruction to a doctor. If it is a complex case the letter of instruction may take some time and possibly involve instructing a barrister. They would have precedents for the simple cases like the standard motor vehicle accidents. This means the firm has to put in a couple of hours of work at this stage.

As an alternative to an automated process, most firms would just have a 15 minute consultation that is free with the client where they work out pretty quickly if there is any chance at all. If it sounds like a terrible case that is too risky they will not take it unless the client agrees to pay the hourly rate and put money in trust, i.e. they will take the case but not no win no fee.

An automated process would mean people who want to have that face to face consultation or at least a consultation over the phone would go to a firm that offers that. You are correct in that there are many firms, including just general firms, who will take on speculative personal injuries matters. The rewards are quite high and often involve minimal work since 95% of the cases settle. Therefore, if the big firms lose that personal touch they will likely find people will tend to go to the solicitor who will give them the time of day. Personal injuries firms are more in the listening business then the legal business. Clients want to be listened to. They want someone to hear their story and their problems. Some of those tend to be quite relevant though. A person going on for 30 minutes about how they can't pat their cat called fluffy after the accident because they can't bend down may seem irrelevant but actually that's something they can't do anymore and if it had that much of an effect on them that they can talk about it for 30 minutes that's evidence that goes to the effect the injury had on their life and could increase damages.

 

[skyQuake]

May be QPP can use all that cash from SGH's acquisition and buy SGH back... that would be pretty funny.

Can't wait to see this!

 

[skc]

The number of cases in the pool and the relative simplicity of the cases involved tells me that they really should do well.

This isn't heavy duty contract litigation, or Mabo, or even the vibe. It's neck braces and cheap-suited ambulance chasers.

There are 2 caveats.
1. Are the QPP cases on the balance sheet properly selected and properly progressed in line with their capitalised value?
2. The market may have simply over glorified SGH's business (due to acquisition and accounting) in the past. SGH might do well running this simple operations, but I see little hope of it's share price and multiple returning to where it used to be.

What's a brand worth any way? Does Joe Bloggs really know if he would have got a quicker or bigger claim at the firm up the road? As long as he is successful I'm sure he'd never notice. You can play sombre / inspiring / tragic music on TV ads all day, but does anyone really know the difference between Maurice Blackburn and S&G or the local firm making an occasional appearance?

No but that's exactly why the brand (and unaided recall rate) is important. Plus it's "feed-in" network. The more chances you get to "touch" a potential RTA client (via car hire, healthcare, insurance claim etc), the more chances you'd get the work. So all those seemingly non-core businesses collected by QPP does make some sense.

Personal injuries firms are more in the listening business then the legal business. Clients want to be listened to.

Nice insight. Reminds me of the scene in Erin Brockovich (the movie) where she had all the client's number and family background in her head.

I have a very intricate understanding of exactly how their business works by the way, so prepare to be ripped to pieces on any silly answers:

Any more insight on the whole SGH/QPP story?

 

[Valued]

Any more insight on the whole SGH/QPP story?

Nope. When I say I have an intricate understanding of their business I don't mean financially or on the balance sheet, I mean their actual legal business and what is involved. I am not interested in investing in SGH so I haven't made it my business to know the finance side of things. I know exactly how personal injuries matters proceed down from A-Z including specific steps including what they look for in medico-legal reports down to the exact forms they fill out and how they fill them out under the relevant legislation (it differs from state to state, there is a huge difference between proceeding in Qld and proceeding in NSW, for example).

If QPP is a case or something to do with their legal business, then if you can explain to me what you know is going on, I may be able to offer some insight. I have a law degree which is why I understand their business from that perspective. If you want to know more about that side of things fire away.

 

[skc]

Nope. When I say I have an intricate understanding of their business I don't mean financially or on the balance sheet, I mean their actual legal business and what is involved. I am not interested in investing in SGH so I haven't made it my business to know the finance side of things. I know exactly how personal injuries matters proceed down from A-Z including specific steps including what they look for in medico-legal reports down to the exact forms they fill out and how they fill them out under the relevant legislation (it differs from state to state, there is a huge difference between proceeding in Qld and proceeding in NSW, for example).

If QPP is a case or something to do with their legal business, then if you can explain to me what you know is going on, I may be able to offer some insight. I have a law degree which is why I understand their business from that perspective. If you want to know more about that side of things fire away.

I see. Thanks. I am more interest in the financials and whole of company stuff, and don't have any specific law-related question at present.