Integrating well and on track
Slater & Gordon (SGH) has produced a strong performance in the half year to 31 December 2013, and has confidently reiterated its guidance for the year. The existing Australian and UK businesses continue to provide growth while the integration of fast-tracked UK acquisitions is proceeding well, with prospects of further growth. SGH is seeking to build a dominant direct to consumer legal business based on a leading brand; it estimates its UK consumer personal injuries market share has now reached c 5%, leaving it well positioned in a fast consolidating market.
H1 leaves full year well on track
With continuing organic growth and acquisitions integrating well, revenues grew 22.3% in H1, EBITDA margin, adjusted for acquisition costs, was an underlying 23.1%, cash flow from operations, at 91.5% of net profit, was ahead of the 70-80% target, and the interim dividend was increased 9.1% to 3.0 cents per share. Full year guidance was reiterated with a noticeable increase in confidence.
UK integration progressing well
Taylor Vintners, Goodman and Pickering have already been integrated on to a common practice system and rebranded S&G. The larger Fentons is undergoing a phased integration to mitigate risks, and is planned to join a new, common practice system (including the Pannone acquisition, expected to complete this month) in March 2015. The enlarged UK business expects to see a greater share of more complicated serious personal injury cases, with a corresponding increase in EBITDA margin. We now expect a pause in SGH’s UK acquisition programme as it integrates and grows its existing businesses, but a significant growth opportunity remains. The group’s UK market share of c 5% compares with a domestic Australian share of c 25%, while the addressable UK market is estimated to be four to five times larger.
Valuation: Shares have responded well
As the only directly quoted consumer law firm in the world there is little valuation comparison. The shares have responded well to the continued development of the group and the visibility of performance compared with more cyclical areas of the Australian equity market. The current FY15e EV/EBITDA ratio of 9.1x suggests near-term upside is more limited, but is not excessive given SGH’s room for growth in an economically-defensive industry. Our DCF valuation (see page 6) of A$4.92 per share equates to a 13.6x FY15 P/E ratio.
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