Baillieu Holst research wrap

Copy & Paste from BH market wrap.

SGH was the whipping boy today for the market as the parent of the recent UK business went under Financial Conduct Authority inquiry into the public statements about its 2013 and 2014 financial accounts. BH analyst is
comfortable with the SGH management view on the transaction while the shorters are playing the scare story. This will prove to be either a great fancy accounting or big short squeeze on bargain hunting as details come out.

Slater & Gordon (SGH) – Rating: BUY - Price Target: $8.30
Briefing: SGH has held a market briefing covering the operation of the recent PSD acquisition in the UK covering the market opportunity, the business in detail, the potential of the business in the context of the broader SGH group, and an update to the outlook.
Key takeaways: 1) the acquisition of PSD is viewed by SGH as totally consistent with its objective of leading consolidation in the previously fragmented UK personal injury legal market and it views PSD as the best opportunity available in the market; 2) whilst PSD is consistent with SGH’s traditional bread and butter of taking a personal injury from a car accident to legal resolution, the acquired business is very different in terms of distribution and the provision of a multitude of ancillary services; 3) SGH cites that no negative material surprises have been encountered since the acquisition has been announced; 4) a number of potential future synergies between SGH and PSD exist although the initial focus for PSD will be on optimising case mix and resolution rates; 5) 30% FY16 EPS accretion from the acquisition again confirmed relative to pre-deal consensus forecasts; 6) SGH CEO responded to a range of risk issues that have been cited by the market from the PSD acquisition (see page 3); and 7) better understanding of the revenue model of each part of PSD was obtained from the briefing (see page 3).
Guidance: SGH has updated FY15 and provided FY16 guidance as follows: 1) FY15 revenue guidance (ex-PSD) increased from A$500m to A$520m with the revision now due to recent smaller acquisitions in the UK and the impact of currency – not unexpected; 2) FY15 guidance for normalised EBITDA margins of 23-24% cited as “on track”; 3) FY16 non PSD Personal Injury and General Law revenue growth of 5% and 8-10% respectively; 3) FY16 PSD revenue and EBITDA guidance of GBP352m and GBP95m respectively retained; and 4) PSD to make no net contribution to SGH’s bottom line in FY15 with the one month of trading in the core PI business offset by a loss in the Non Induced Hearing Loss (NIHL) business with no revenue booked to match expenses – this is not forecast to continue into FY16.
Changes to forecasts: We have lowered FY15 forecasts to remove any contribution in June 2015 from PSD as above. Nominal changes to FY16 and FY17 forecasts.
Investment view: BUY call retained with revised DCF valuation of A$8.30 (prev. A$9.47) and price target of A$8.30 (prev. A$9.45). We have lowered our valuation based on a more conservative view of long-term growth. We view the SGH story as in a period of transition from the mid-cap space to the ASX100, market digestion of a sizeable raising and a time when the jury is likely to remain out until the value of the PSD acquisition is proved. The PSD acquisition remains an enormous opportunistic leap for SGH which requires investors to hold their nerve for a number of months to come. We continue to back the SGH story based on track record and valuation.