With operations in Australia and the UK, legal firm Slater & Gordon Limited (ASX: SGH) is a fast growing business with considerable ongoing potential. At present 80% of revenue comes from personal injury (PI) cases and the remaining 20% from general legal work. Class actions constitute about 4% of overall revenues and are included in general legal work.
Slater & Gordon anticipate total PI cases will grow between 5%-7%pa over the medium term and general legal 3%-5%pa. Most PI cases are resolved by settlement with insurance companies providing a predictable cashflow stream. General legal work includes such standbys as family law, conveyancing and will preparation. The company believes their scale and efficient processes provides a cost effective solution for clients in the general area while most of the PI work is done on a 'no win no fee' basis.
Although well known in Australia the real growth engine is the UK where several strategic acquisitions have been made over the past few years. Slater & Gordon now has about 5% of the large UK market and is aiming to reach 10%-15% in the medium term. So far all acquisitions have been integrated smoothly and are growing strongly under the parent brand. As the UK is a highly fragmented market acquisitions have been completed on reasonable multiples and contribute quickly to profits. In my view the danger period in the UK is now over and this innovative legal company has the momentum to become an important identity in the UK.
And the estimates stack up too – earnings per share of 27c in 2014, 34c in 2015 and 38c in 2016. At $4.47 this places Slater & Gordon on price earnings ratios of 16.6, 13.2 and 11.8 respectively. Management predict UK revenues will at least equal domestic revenues within two years. Importantly UK margins are similar to the domestic operations. In my view there's plenty of growth to come in this stock.
Another legally related share set for a dramatic new growth phase is the litigation funder Bentham IMF Ltd (ASX: IMF). Recent moves include the joint venture with the US-based Elliott Management Corporation – founded and still headed by renowned activist investor Paul Singer. Elliott is one of the oldest hedge funds and has an outstanding record over many years.
Initially focused on the UK, Europe and the Netherlands the new 50/50 joint venture will share the costs and rewards on mutually agreed cases. In addition Bentham IMF will receive fees for case management services. This new partnership will help Bentham IMF take on larger cases and establish credibility in international markets. Bentham IMF has also announced an intention to raise $50m from the issue of secured corporate bonds; further strengthening the balance sheet.
Bentham IMF has extremely astute management and an excellent strike rate with cases undertaken. What it doesn't have is a predictable earnings stream and is best viewed as a portfolio manager wherein the investments are legal cases. In my view Bentham IMF ($1.79) is in deep value territory.
Foolish takeaway
Having first bought into Bentham IMF and Slater & Gordon several years ago I believe the best is still ahead for these companies. As businesses they aren't subject to market fads and have the capability to keep growing through economic cycles. Both have managements who clearly enjoy their work and the associated challenges. And both are priced for an investor's picnic.
