It's been a great day for shareholders of embattled law firm Slater & Gordon Limited (ASX: SGH). Its shares have bolted higher by around 6% just a day after it announced that it would be making a $1 billion full year loss.
Personally, I'm not actually that surprised to see its share price rise. The $1 billion headline loss is undoubtedly a shocking result, but if you look close enough you will see reasons to be optimistic.
Firstly it is worth remembering the full year $1 billion loss is largely a result of an $876.4 million non-cash impairment charge against goodwill on its UK operations, which brought its first half loss to a massive $958.3 million. An improved performance in the second half means Slater & Gordon is expecting to post a loss of $59.3 million for the six months ended June 30 2016.
Another reason to be optimistic is the fact that its lenders have now been appeased. The successful bank facility amendments agreement means management can turn its focus onto executing its performance improvement program across the business. Moving forward this is expected to improve profitability and cash flow, as well as reduce its sizeable debt.
Managing director Andrew Grech has described this year's performance as "a story of two different halves." Mr Grech appears to be very pleased that slowly but surely the steps the company is taking to turn around the performance of its UK business are starting to bear fruit.
It is of course still very early days and there's a lot of work ahead for the company. But if its performance improvement program is as successful as it hopes, then I wouldn't be surprised to see Slater & Gordon return to profit within the next couple of years.
But unfortunately I'd still class the investment as high risk at present and not one I'd personally take on. For now I would instead focus on other companies in the legal space such as IPH Ltd (ASX: IPH) and Xenith IP Group Ltd (ASX: XIP).
