Slater & Gordon (ASX: SGH) has announced record results for the 2013 year. Highlights include:
- Revenue up 36.7% to $297.6 million
- Net profit up 67.6% to $41.9 million
- Cash flow is sound at $32.7 million
- Debt management is good with interest cover of 11
- Earnings per share 23.8c, dividend 6.6c fully franked
Professional service firms such as lawyers can at times be very attractive investments. With high barriers to entry, limited competition and a fairly litigious society, above GDP growth can be reasonably assured – even more so if you're good at what you're doing, and Slater & Gordon fits neatly into this mould.
Its record of progress is interesting:
- First law firm in the world to list on a stock exchange (2007)
- 75% of revenue derived from personal injury litigation
- Net profit margin hovers around 15%
- 95% success rate with cases undertaken on a no win, no fee basis
- Successful expansion into the UK, a market 4-5 times the size of Australia
- Taking steps to expand range of legal services, smoothing out cashflow
It's estimated Slater & Gordon has a dominant 25% of the personal injury (PI) market in Australia and the domestic expansion into family law, estate law, and other consumer legal services is expected to provide low double digit growth (albeit off a low base).
Slater & Gordon is also involved in class actions, now largely funded by outside parties. Although its record in this specialty is patchier than that of IMF (ASX: IMF) it does provide another string to its bow. 2013 results were again negatively affected by the Vioxx class action going against it although the major write down here was recorded in the 2012 results.
The most promising area for future growth is the bulking up of the UK presence. In the UK, law practices are extremely fragmented and opportunities for consolidation and branding are open. Practice areas in the UK firms are similar to Slater & Gordon's operations in Australia.
In the UK personal injury cases are sourced by claim management companies which then on sell 'leads' to legal firms. Slater & Gordon has sidestepped this crusty convention by marketing its own "Claims Direct" business, now one of the most recognised legal brand names in Britain.
Slater & Gordon has announced the acquisition of two more UK legal firms (effective this month), and an agreement signed with a third to be finalised in early 2014. The new acquisitions are expected to be earnings per share accretive in 2014 allowing for dilution. Revenue from the UK is forecast to be more than $115 million in 2014 and SGH has now established a credible platform for substantial organic growth in Britain.
Foolish takeaway
Although no industry is recession-proof, legal services come pretty close to it. There are some regulatory risks (for example, Slater & Gordon is unable to advertise in some states), however, these seem to be manageable. At $3.20 Slater & Gordon's 2014 price earnings ratio sits at 11.8 – undemanding for a company with a very solid growth outlook. Slater & Gordon is not for income investors, as profit is retained in order to grow the business. In this Fool's opinion, this business is a good buy.
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Motley Fool contributor Peter Andersen owns shares in Slater & Gordon and IMF.
