MACQUARIE: There's more downside for Slater and Gordon

Daniel Kelly of Australia (R) punches Steve Montgomery of the US in their middleweight bout during in Melbourne. Quinn Rooney/Getty Images

Slater and Gordon doesn’t have flexibility to withstand a significant earnings hit, according to analysis by Macquarie Securities.

The law firm, facing regulatory changes in the UK which will impact its road traffic compensation business, has been sold down heavily over the last two days.

There are two key proposals to reduce the incentive to claim and therefore reduce the number of people needing legal advice for compensation: the removal of the right to general damages for minor injuries; and increasing the small claims limit for personal injury to £5,000 ($A10,400) from £1,000 ($A2090).

Macquarie says the changes are still only proposed but the intentions appear clear and, if implemented, would be negative for Slater and Gordon.

“With over $650 million net debt, SGH’s balance sheet position in our view does not afford much flexibility to withstand a significant earnings hit,” Macquarie says.

“Acknowledging the heavy sell-off in recent days and the discount to our valuation based on current earnings, we still see significant further downside if the reforms are implemented.”

Macquarie rates the stock as UNDERPERFORM and has reduced its price target to $1.00, from $4.59.

“No change to forecasts at this point,” says Macquarie.

“Earnings visibility is now low given the regulatory overhang. We expect the stock to trade with a high degree of uncertainty and at a significant discount to valuation based on current earnings until it is resolved.”

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