Law firms have performed strongly in 2014, with both Slater & Gordon Limited (ASX: SGH) and Shine Corporate Ltd (ASX: SHJ) increasing by over 30%. This has prompted me to ponder which company is the better investment, and below are three reasons why I favour Slater.
Diverse legal practice
Both companies specialise in personal injury law. Whilst Shine's strategy of 'Inch wide mile deep' strengthens its position in its niche market, it also means it is more vulnerable to negative legislation changes in the segment. A good example is changes to Queensland's workers compensation scheme in late 2013. This change is forecasted to negatively affected Shine's FY15 NPAT by 2 – 2.5%, but the impact for Slater should be negligible since this segment was only 5% of total FY14 revenue.
Although Shine has taken steps to diversify by growing its Emerging Practices segment, it still only accounts for 15% of FY14 revenues whilst Shine's General Law segment makes up 20%.
International exposure
Slater expanded to the UK in 2012 and believes it now has 5% of the personal injury market share, generating 44% of total revenue from this location. This provides access to a larger market and so will likely provide greater client volume and revenues. The increased market size is especially important for legal companies mainly focused on personal injury cases because there is unlikely to be a high number of repeat customers. (A person is likely to avoid being in situations that led to the need for legal service, or cannot in the case of tragic worker compensation cases) Further any uplift in profitability will be amplified when converted to Australian dollars.
It needs to be noted that Shine is a JV partner of Risk World Wide New Zealand Limited, but the JV contributes significantly less than 10% of total revenue.
Superior acquisition record and strategy
Both companies have caught on to the consolidation occurring in the legal industry, making a string of acquisitions over the past few years. Whilst the acquisitions made by both companies have been successful, Slater probably shades Shine with its decision to expand in the UK. More impressive however is Slater's post acquisition strategy.
Shine has decided to retain branding of both Stephen Browne and Emanate Legal post acquisition. Whilst these might be strong brands within its niche market, the Shine brand is likely to be more widely known. By rebranding these acquisitions Shine can market its enhanced offerings in these markets under the Shine brand, and rely on word-of-mouth advertising from former and current Shine clients to improve brand value. Realising the benefits of this, Slater will be converting all of its acquisitions under the well known Slater & Gordon brand.
