Here's how UBS sees the disaster at Slater and Gordon

Photo: Martin Hunter/Getty Images

The brutal dumping of Slater and Gordon, one of Australia’s oldest law firms and the first in the world to list on a stock market, was sparked by one more piece of bad news in a long list.

The British government’s moves to cap personal injury compensation means the UK business Slater and Gordon bought for $1.3 billion in March, Quindell, is under threat from proposed regulatory measures.

The law firm had already been examined by ASIC, had to change the way it reported cash flow from the UK and made changes to already reported results. It then replaced its CFO and then told its AGM that its UK business was having a slow start to the year.

And UBS, along with many other analysts, found it hard to believe Slater and Gordon’s full year earnings guidance of $205 million after a weak first half.

Then yesterday the UK government foreshadowed changes which go to the heart of Slater and Gordon’s compensation business.

UBS, in a note to clients, says the changes, if implemented, could have a significant impact on UK operations.

In light of that, UBS reduced its EBITDA estimates by 44% and EPS estimates by 50% for 2017-18.

About 90% of the cases of the recently acquired Quindell division are focused on road traffic accidents and represent a significant amount of earnings.

The UK Government says it intends to introduce measures to reduce compensation for minor whiplash injuries.

The public policy driving these plans is to crack down on a fraud and claims culture in the motor insurance industry.

“Given these potential legislation changes and our previously flagged concerns over FY16 guidance we do not expect the stock to outperform and maintain our Neutral rating,” UBS says.

UBS maintained its NEUTRAL rating on the stock but reduced its price target to 90 cents from $2.80.

“This reflects the change to our earnings estimates and a reduction in our assumption of reported EBIT conversion to
free cash flow to 30% from 50% to reflect the increased level of regulatory risk,” UBS says.

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