Scale and growth
Slater & Gordon Ltd (ASX:SGH) is the leading consumer law firm in Australia and has been expanding into the much larger UK market, which we review in detail in this note. Its differentiating features include economies of scale, work process engineering and using its brand to market directly to clients. Its UK operations appear less exposed than the market to the Jackson reforms and the Mitchell ruling and they should provide opportunities for both organic and inorganic growth.
Key business model differentiators
SGH achieves material economies of scale by mapping legal processes and identifying opportunities for aspects of the work to be automated and/or performed by supervised staff, who while not admitted to practice as lawyers themselves are supervised by qualified lawyers and trained to perform key components of work. For example, it is much more efficient to chase doctors for medical reports through an administration centre than having expensive lawyers do so. Developing backoffice expertise improves service levels and leads to more rapid case conclusion, which means better cash flow. SGH’s scale also gives it access to capital markets, which is important for funding working capital, which can be a major constraint on business growth. SGH is also differentiated by using its brand to market direct to customers rather than relying on third-party introducers. This may prove especially advantageous in the UK, where changes in regulations may see such third-party distribution under the greatest pressure.
Growth options
SGH estimates it has a market share in Australian personal injury cases of c 20%. It expects this market to grow by 5% pa. Its market share of other personal legal services is around a fifth of this. SGH intends to use its brand to increase this share, with top-line growth in non PI consumer legal services expected to grow at >10% pa on average. In the UK – a market considerably larger than Australia – SGH’s market share is now c 5%. FY14 will see the benefit of acquisitions with future organic UK revenue expected to grow c 8-10% pa. SGH is less exposed than most to regulatory reforms and pressure on weaker players is expected to see consolidation. SGH has also a successful track record of acquisitions in Australia and the UK and it is anticipated that acquisitions will add a further layer of growth.
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