FY14 ahead of forecasts
Slater & Gordon's (ASX:SGH) FY14 results were ahead of expectations driven by a beat in UK revenue. We believe this, and two new Australian acquisitions announced with the results, will see consensus upgrades. Management is guiding to further modest acquisitions in FY15. SGH’s own-brand development, tight management of workflow and economies of scale are delivering good growth. The dividend was increased from 6.6c (FY13) to 8c (FY14).
FY14 key issues
Revenue grew 40.4% on FY13 (38% excluding a £7.4m one-off credit, 32% on constant currency). Australian revenue was up 4% with a fall in Queensland revenue post regulatory changes partially offsetting 9% growth in the rest of the country. In the UK both established business and recently acquired businesses delivered c £49m each in revenue with management estimating underling growth of 8%. Personal Injury (PI) cases generated 80% of revenue. Underlying costs rose 37% (ie below revenue growth of 38%). Post-tax profits were up 47% with reported diluted EPS up to 29.8c (from 23.3c). Edison’s normalised EPS rose from 24.1c to 31.7c. Operating cash flow as a percentage of net post-tax profit was 89.7% (FY13 78%) aided by a one-off acceleration after an acquisition and tax management. The FY14 dividend was increased to 8c (from 6.6c in FY13).
Outlook
SGH also announced two acquisitions in Australia. With these adding c A$25.6m to revenue, the management guidance of A$500m looks credible. We have slowed forecast growth in Australia to reflect a further modest impact from the Queensland reforms. Long-term growth of 5% in PI and 8% in General Law appear practical. Our UK revenue has been increased to reflect the FY14 outperformance. We see a range of opportunities for growth once the recent acquisitions have been fully bedded down (March 2015) and the market disruption from major regulatory change moderates. Management guidance remains for group operating cash flow as a percentage of net post-tax profit to be over 70%, which again appears credible.
Valuation: Around fair value
The average of our valuation approaches is A$5.82 (c 15.3x FY15e EPS). This is on the basis of existing business, and further acquisitions may generate upside. Our forecasts are consistent with management guidance, and historically this has proved somewhat conservative.
To Read the Entire Report Please Click on the pdf File Below