MENU

Why the Slater & Gordon Limited share price crashed today

ASX-listed companies appear to have a fair bit of latitude when it comes to labelling announcements as ‘market sensitive’ or ‘not market sensitive’.

Many times, shares rise or fall in the absence of being labelled market sensitive updates, and Slater & Gordon Limited’s (ASX: SGH) (“SGH”) announcements today were one such occasion.

Management provided non-market sensitive copies of presentations made by the Chairman and Group Managing Director at its Annual General Meeting (AGM) today. The key takeaways of these presentations are as follows:

  • Australian Securities and Investment Commission (ASIC) review of SGH financials still ongoing
  • Australian businesses on track to meet earnings targets
  • Slower-than-expected start to year + loss of productivity in UK due to business integration and new systems
  • Some delays to case resolution in UK due to introduction of new medical reports system by British Ministry of Justice: “some ground has been lost in the first six months which we will not make back
  • Change in legacy case intake strategy likely to lead to shorter processing times and a better chance of success in future, but will impact Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) by £20 million due to lower work in progress charges
  • Total Road Traffic Accident (RTA) in newly acquired Slater & Gordon Solutions (SGS*) cases resolved expected to be 70,000 instead of 77,000 previously. Case intake expected to be 73,000 instead of 95,000 previously estimated
  • Noise Induced Hearing Loss (NIHL) portfolio performing as expected
  • ‘Seeing good opportunities’ in the Motor Services market
  • Slower-than-expected start to the year in Health Services business, expected to finish the year below expectations
  • As a result of slower-than-expected start to the year, operating cash flow is expected to be negative A$30-40m in the first half of 2016, with ‘a strong recovery’ expected in the second half. Company is expected to be able to meet its obligations to financiers
  • Company does not foresee any negative regulatory impacts which are likely to impact 2016 forecasts
  • Company reaffirms its guidance for Financial Year 2016 of Total Group Fees of A$1,150+ million and Group EBITDAW (EBITDA + movements in Work In Progress) of A$205+ million

*SGS = The now-renamed Quindell’s Professional Services Division, recently acquired by Slater & Gordon

If you made it through that wall of text, congratulations. It seems that Slater & Gordon can’t buy a break, with weak performance in the UK division impacting cash-flow and delaying the group’s ramp-up in the UK. Shares declined more than 10% so far today at the time of writing.

It couldn’t have come at a worse time, with investors already nervous about the company’s acquisition strategy and the ongoing investigation by ASIC. However, if you can look past those issues, most of today’s nervousness appears to be over short-term issues.

A billion dollar acquisition is no small bite for a company with a market cap of around $2 billion (at the time) and it is reasonable to expect that the integration might be slower than investors would have liked.

With that said, cash outflow of A$30-40 million is a big hit to a company that only generated $40 million in cash from its operations in 2015 (bearing in mind that this was pre-Quindell acquisition). Although management assures investors that cash flow will recover in the second half of 2016, I would wait to see signs that a slow start to the year isn’t just a ‘new normal’ before buying Slater & Gordon shares.

Want to know our safest and most secure way to make money in the market right now?

Scott Phillips, lead advisor of Motley Fool Share Advisor, has just released his #1 dividend stock for 2015-2016, and it looks to be an OUTSTANDING buy today. In fact, I recently doubled my holdings!

Simply click on the link, enter your email address, and we'll send you our full coverage for free - no credit card details or payment required!

What are you waiting for? Just click here now for your copy.

Motley Fool contributor Sean O'Neill doesn't own shares in any company mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.