By now, most readers should be familiar with Slater & Gordon Limited (ASX: SGH) and its difficulties.
(If you're new to the story or looking for a recap, you can find a timeline with links to our earlier coverage here).
The legal firm is expected to report its audited first-half results on the 29th of February, and investors are likely to be very nervous.
Adding to the problems outlined in the above link is the fact that in December, Slater & Gordon informed the market that it would provide an update on its cash flow situation in January. This update was disappointing, involving little more than a bland, "The Company continues to work with its auditors and advisors to finalise its half year result including statutory gross operating cashflow."
While there is some virtue to not releasing information if it is unknown or not known with sufficient certainty to be taken as fact, for a company in a situation like Slater & Gordon a lack of information only fuels investor nervousness – especially in the context of the company's previous withdrawal of guidance.
As a result, I believe there are three things investors should watch for in the upcoming report:
- Cash Flow
Slater & Gordon previously guided for the company earning A$205m + in Earnings Before Interest, Tax, Depreciation, Amortisation, and Work-in-progress (EBITDAW), 100% of which would be cash earnings. However, since the retraction of guidance, it is uncertain how much cash earnings will come in below this level. One research report, published several months ago (and thus before latest events) on Slater & Gordon's website, suggests cash EBITDAW could be around $130m-170m.
However, Slater & Gordon also announced that it expected net cash outflows in the first half of 2016, which would place additional pressure on its cash balance and mountain of debt.
Although my ballpark calculations indicate Slater & Gordon has enough cash and debt available to see it through the first half and into the second half where trading conditions are expected to improve, further upsets would place the company's future under a serious black cloud.
- Asset Impairments
Management indicated it would test its UK assets including Slater & Gordon Solutions (SGS; the former PSD division of Quindell) for impairment in the six months to 31 December 2015. While testing for impairment is routine, I consider there to be a medium chance that Slater & Gordon could impair the value of its investment if tough trading conditions are expected to continue and/or changes to personal law are expected to impact case values.
Although asset write-downs would be 'non-cash' i.e., not affecting the company's ability to service its debt, they would be a nightmare for investors given the recency of the Quindell acquisition. Effectively, write-downs would mean a significant chunk of money used to make that purchase would go up in smoke.
- Share Price
While Foolish contributors tend to encourage readers not to focus too heavily on the share price, that's easier said than done when you're sitting on a 90% loss in the past twelve months.
Much hinges on the Slater & Gordon's cash flows. If they're better than expected, and reasonably close to the previously indicated $205m, shares could soar. However, if they're worse than expected – and investors are unsure what to expect because of the company's failure to provide an update in January – Slater & Gordon shares could easily lose another 15-20%, if not more.
Either way, readers are unlikely to see prices of $7 again in the foreseeable future. Stay tuned for further coverage when SGH reports!
