Slater and Gordon, the Australian law firm established in 1935, has a lot at stake in the UK.
What’s happening there has crushed the law firm’s shares over the last two days, down more than 51% on Thursday and 25% so far today.
As this chart from CLSA shows, only 28% of forecast earnings for the current financial year are from Australia, the rest is in the UK.
SGS, shown at 41% in the chart, is the renamed Slater and Gordon Solutions, the business acquired for $1.3 billion in March from Quindell.
It’s supposed to deliver up to 74% of earnings from the UK.
But the newly acquired business relies substantially on motor accident compensation claims.
So when the UK government said it is moving to reduce the number of compensation claims from traffic accidents needing legal advice, analysts start cutting forecasts and share price targets for Slater and Gordon.
Essentially the government wants to reduce the number of claims for whiplash, the core of Slater and Gordon’s compensation claims business.
But analysts were starting to worry before the UK government statement.
CLSA, in a note to clients, says its doubts around the firm’s ability to achieve profit targets was confirmed when Slater and Gordon downgraded the number of motoring-related case estimates in the UK from 95,000 to 73,000 for 2016.
One big lost contract saw about 6,000 cases disappear.
The fall prompted Slater and Gorden to forecast negative operating cash flow of between $30 million and $40 million for the first six months of this financial year.
However, it still kept to its $205 million full year earnings guidance. Many analysts believe, however, that cannot be achieved.
“Guidance around operating cash flow was worse than our expectations and again raises question marks over the rationale and price paid for the SGS (Quindell) acquisition back in March,” says CLSA.
CLSA has no confidence around guidance.
“It will be critical for Slaters to improve case settlements in the troubled SGS (UK) acquisition and generate positive operating cash flow,” say CLSA analysts Oscar Oberg and Naveen Patney.
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