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Slater & Gordon: A faintly familiar story continues

Slater & Gordon Limited (ASX: SGH) published its preliminary full year results on Friday. Even though revenues were up 19.4% to $218m, net profit dropped by 10% to $25m. Management’s view was that if the Vioxx class action failure was excluded, normalised profit actually increased.  Shareholders should be relieved, given the number of large acquisitions that have taken place.

Low Cashflow

Operating cashflow deteriorated to $15m, and cash from investing activities chewed up a massive $70m.  Finance costs totals $6.8m for the full year.  Yet curiously enough, despite this cashflow situation, Slater & Gordon will pay significant dividends again.  The following is a table summarising the cashflow situation for the last five years.

  2007 2008 2009 2010 2011 2012
Revenue 63 79.7 103 122 178 214
NPAT 10.6 15 17 19.8 27.9 25
Operating Cashflow 8.5 11.5 -0.7 24.7 20 15
Free Cashflow 4 -3 -11 9 -47 -55

Increasing Debt

Once again, the latest cashflow deficiency was plugged by an increase in borrowings.  The total liabilities of are now $282m.  On the asset side of the balance sheet, there is $128m in accounts receivables, and $246 m comprising “Work-In-Progress”.  With $15m of cashflow to cover $6.8m in finance costs, there really is not much room for error, and shareholders will hope that the costs of funding do not spiral out of control, and that debt rollover takes place smoothly.

ROE and ROIC versus Money in the bank

As at 30 June 2012, Slater & Gordon had total assets of $525m and net assets/equity of $243m. It made $15m in net profits.  This is about 2.85% per annum return on total assets, and 6.2% per annum return on equity.  At these rates of return, shareholders are not compensated for the additional risks involved.  Returns need to be at least double this to qualify as investment grade.

Foolish bottom line

Slater & Gordon has made its way into the good graces of Mr Market in the last six months.  Current prices imply a market valuation of about $320m for SGH, which is an increase of 28% in the last six months. We would prefer to watch this from a safe distance.

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More reading

Motley Fool writer/analyst Peter Phan doesn’t own shares in Slater & Gordon. The Motley Fool‘s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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