Hi Primaus72,
PI income is not really defensive. Anyone saying that is actually misinterpreting both the model, and what goes on. Certainly, claims increase during tough economic times, but other than from an employment law perspective, many of these increased claims arise at the margin. That is, where the likely payments involved are of a lesser amount (ie: weekly payments, as opposed to a lump sum settlement, etc), or involve "soft' claims (ie: soft tissue, psychological, bad backs, etc).
Accidents or workplace injuries, or motor vehicle accidents, etc do not increase in statistical frequency on account of any tough economic times. if anything, it's the reverse as to timing (ie: better times, more mistakes, etc).
In any event, SGH asserts a 95% success rate but whilst highly commendable, this result is only achieved after much filtering has occurred. many of these are more employment /dismissal, or similarly based rather than as PI claims. certainly, they field many enquiries throughout the year, but they also filter many of these out. As such, the claims that they take on are either those with a very high probability of success occurring (post-filtering), are novel (ie: unique circumstances, etc), are niche (their work with asbestos claims probably leads the country by a wide margin), or are mass based (linking back in with through their union connections, etc). This is not to say that what they are doing is wrong, but rather that they are largely insulated (via their filtering processes) from any uptick in claims, occurring at the margins, on account of change sin economic conditions.
This said, SGH's filtering process also works in another way, which is to filter out those claims which are of marginal utility. That is, either increased risk, or high cost exposure, or marginal return, relative to the cost of invested resources).
Much of SGH's work also occurs away from the glare of the courtroom with most claims (where sorted) being addressed at regular interactive meetings held between the major plaintiff lawyers and TAC and WCV (etc). That's in Victoria, but I suspect that it's much the same throughout Australia. Increasingly also, costs against claims are also being commoditised (that is, listed /worked out according to formula, protocol costs, or some measure of scale).
This then perhaps is one reason why SGH have increased their exposure towards "project litigation" which is a potential growth area for them. But away from this, and back towards PI, it is also another reason why they have been buying up PI firms (ie: to access their WIP, their case loads, etc, and to close those matters out on a timely, more efficient basis).
If you look at their WIP days, in F11 they were 369 days (F10 = 353). In F12 , WIP days were 377. In F13 they were 412. In F14 they were 441 days. At the 15H results, they were 447 days.
Such an increase really is not good. It doesn't demonstrate a growing business. Rather it demonstrates a mixed bag of growth, entrenched and stale WIP.
But consider this in another way. Back in F11 at the results presentation, they were quite optimistic about the future.
Indeed, in that F11 annual results presentation, they lifted their F15 revenue guidance from $257m to $307m, of which PI was estimated at $175m before revision, and $235m, post revision. Refer presentation at p16 (16/8/11). Now, this was at a time when the F11 results were $182m ($178m in services revenue). So, the future growth trajectory was considered quite significant. This was also at a time which was BUK (Before UK).
During F12, SGH entered the UK market. By 2014, that market was generating $182.5m in revenue. In F15, the UK revenue estimate, using 2014 as the base, + new F15 acquisitions (+ contributions), and an average GBP exchange rate of £0.506, is likely to have grown to >$201m.
Total Australian revenue (revised) for F15 was recently put at $520m (up from $500m).
Since F11 however, SGH has spent $9.5m on Australian acquisitions (F12 - Conveyancing Works, Bussoletti, David Nagel)), $9.8m in F13 (Clark Toop & Taylor, Hilliard & Associates), $3.3m in F14 (Gibson & Gibson), and during F15 - $45.2m (Nowicki Carbone + Schultz Toomey O'Brien).
Considered in another, the F11 results presentation (at slide 13) said "strong growth and acquisitions have resulted in revised revenue targets for F15 --- combined revenue target up from $250m to >$300m".
Clearly, in making that F11 assessment, it wa son the basis of what they had already achieved and /or achieved, not what they were yet to acquire.
Conveyancing Works was to bring $8-10m in revenue (call it $8m), Bussoletti ($2m), David Nagle ($2m), Clark Toop (1500+ PI files, for an $8.5m acquisition cost, but revenue estimates not advised). same for Hilliard & Associates and for Gibson & Gibson. The Nowicki and Schultz acquisitions however were to bring in $39m annually, of which >$25m is linked to F15. So, if the Clark, Schults and Gibson estimates are put at a further $11 (assuming the same revenue to cost multiple as for Nowicki and Schultz), then you get to acquired revenue (assume, recurring) since F11 of +$48m (or $62m, if annualised) on a cost base framework of $68m.
So, working this back. If in F11 SGH were predicting F15 revenue of $307m based on their then existing framework + acquisitions (all this being BUK), then since then, they have added in at least $48m in recurring revenue through to end F15 (+$62m if normalised). This then should have brought the revised F15 target to >$355m.
All things being equal, if the F15 "visualised" target had been $355m, then counting in for the UK (on the basis of what's known), should have further added $ to the equation.
In 2014, the UK was $185.2m. Since then, upwards of $18.4m (at its highest for FX variation) has been added to that base (assuming the status quo). This then would have taken the UK to $203.6m (call it $204m). Adding this back to the F15 "visualised" target of $355m (allowing for all domestic acquisitions since F11 at their stated revenue levels), and the F15 closing revenue for SGH should be > $358.6m.
Even excluding the domestic acquisitions since F11 (so -$48m), the F15 closing revenue for SGH should have been $307m + $203.6m = $510.6m.
So, either all of the domestic acquisitions since F11 (which have cost $68m) have brought <$10m in added domestic revenue to the table (beyond what they were forecasting in the F11 financial presentations), or some of the WIP acquired /business activities worked in have either not yielded favourably, have contracted, or have become increasingly challenging /contested.
This then possibly explains why they have been buying up WIP, and why the WIP days have progressively moved out, because there is an increasing amount of stale WIP embedded in their structure which is either returning false positives, or is failing, or is yielding a lower return on invested or acquired effort.
Quite literally therefore, SGH's WIP has had to be domestically replaced via acquisition to avoid the WIP from being run down.
This is not necessarily a bad thing, but it does demonstrate that tough economic conditions is not improving the quality of the WIP /revenue streams, but rather potentially marginalising it.
This also potentially explains the shift in focus to the UK where the WIP days are on average 40 - 60% lower than in Australia, the market is much larger, competition is more fragmented, and Slaters have a differentiation model which potentially streamlines the claims and removes the marginal opportunities.
So, to answer your questions:
(1) Possibly increased competition/loss of market share (Shine lawyers etc) might be the real spanner in the works for the AU market.
= Yes, but also the increased emphasis by TAC (etc) to rein in costs, etc.
(2) Apart from being big, does SGH really have a competitive advantage against these smaller firms?
= Yes, but it's in their ability to filter out marginal claims, etc. Increasingly, you are likely to see SGH moving in 2 directions, to the higher end of claims where they will slug it out with Shine, Maurice Blackburn and Arnold Thomas Becker, and to the lower, bulk, production line end, where they will compete with smaller firms, to quickly settle /resolve and be paid for claims, but in which they may also hold a competitive advantage (at least, compared to some).
Remember however, in Australia, Slaters have about 2,700 staff and in the UK, about 2,800 staff. that's a $216m wages bill before super, or other add ons) assuming an $80,000 average in Australia alone. So, they will also need to do some further consolidation work in Australia (of premises, of staff, of working efficiencies, and of claims processing, in order to convert the WIP and reduce those WIP days).
So, Australia is stalling (once the acquisitions are stripped away) and they have been having trouble in converting (monetising) their WIP with WIP days spinning out from 353 in F10 to 447 in H15. Acquisitions since 2011 have either brought little to the table, or if they have, then SGH has not yet tackled the real question of how much of their WIP is potentially stale.
Going forward, this is a risk to them in Australia, as are the twin pressures of competition, and cost management (internally and back at them). The UK however still represents fertile ground for them to work through.
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