Slater and Gordon (ASX: SGH)

I'm posting up a summary of why i bought into SGH a little while back. I hope it is of value to you.

Investment summary


* SGH dominates the domestic market, allowing it to offer pricing models and services which smaller players cannot, creating a valuable competitive advantage
* SGH has identified a similar opportunity for consolidation in the UK and has begun successfully expanding into this market via acquisitions
* SGH has a strong track record of creating shareholder value by acquiring premium international brands that are strategically aligned with its core business – personal injury & consumer law – and highly earnings accretive
* Relatively low leverage with a robust balance sheet and strong operating cash flow generation to offset risk of bankruptcy.


I own SGH because I believe the market is not placing an appropriate value on the quality of the business and its future growth prospects. SGH listed on the ASX in 2007 and has performed very strongly since IPO. Revenue has increased from $60m in FY07 to an expected $540m in FY15, representing an 8-year CAGR of 32%. This growth has been achieved from both strong organic growth and acquisitions.


SGH already dominates the domestic consumer law market boasting a 26% market share. This size, provides SGH with a significant competitive advantage as it gives them access to the most “deal flow”, allowing them to pick-and-choose the deals with the highest expected value. In turn this allows them to offer customers a “no win no fee” pricing model, thereby attracting more customers in a self-fulfilling network effect. Smaller market players cannot offer this arrangement economically. This scale (gained in personal injury [PI]) has also led to a strong brand name which SGH has capitalised on by providing other specialist services.


SGH is drawing upon its success in Australia to enter into the highly fragmented UK market, which is circa 6x the size of the Australian market and where it sees a similar opportunity for consolidation. While growth by acquisition (especially internationally) can be risky SGH have demonstrated a history of successful execution through its acquisition of Russell Jones Walker in 2012, which has continued to remain a market leading player within the personal injury arena. Using their experience integrating businesses successfully, SGH has recently doubled its market share in the UK, from 6 to 12%, with the acquisition of Quindell’s Professional Services Division (PSD).


The PSD acquisition is strategically aligned with SGH’s current competitive edge in the PI arena. Not only have they acquired premium brands and transitioned them prosperously, they have done so in an earnings accretive manner. SGH paid roughly 7x EBITDA for the PSD acquisition, compared with its current multiple of ~15x EBITDA, resulting in a highly earnings accretive acquisition. Ultimately, this allows SGH to gain a better stranglehold of the UK consumer law market via the acquisition on a strong brand with which it can leverage to provide legal services in other areas of the system. When combined with their growing stranglehold of the Australian PI market, this should give rise to abnormal pricing power and thus, a platform to grow earnings at a rate higher than GDP over the medium to long term. I strongly believe that SGH will be successful in consolidating the UK market and achieve a similar market leading position as it has in Australia, thereby achieving the same competitive advantages it enjoys here.


Furthermore this growth by acquisition has not overly strained the balance sheet. Following the latest acquisitions, net debt is expected to be ~$235m as at 30 June 2015, with net debt/EBITDA of approximately 1.9x (June 2015 expected). I believe this level of gearing is entirely sustainable, especially given the strong cash flow generation of the business (free cash flow circa 70% as of net profit).

Please note that this does not constitute personal advice and doesn't take into account your personal finances. Moreover, i have a direct financial interest in the company.