SGH feedback, page-38

After entering two small positions for superfund on Thursday (after exiting completely after AGM) at 99 cents and 94 cents - then being dumped out of those positions next day for a small loss, decided to sit on my hands and wait to till the weekend to do more research. As feel with this new big announcement on thursday I needed the weekend to clear my head to get a bigger picture view before deciding whether I re-enter for investment positions for the superfund.


So what I have reflected on is the two big crises SGH has faced:
1. ASIC investigation has created negative sentiment on this stock and created the shorters playground. Like many given at this stage nothing come out I don't expect anything untoward. But accept ASIC run their own (long) timeframes for investigations, so may well not conclude till April next year as some brokers suggest. Yes this will create a drag and negative sentiment on share price short term (think done the damage now!) but yes don't think "majority" (that includes analysts) disagree that this is more likely to be short term issue only until ASIC conclude their investigation.
2. On the UK proposed legislation change announcement on Thursday - I do find all this talk of liquidation etc on one thread does seemed to be trying to create an uniformed panicky view that is over the top and just plain wrong. As my understanding if take say Deutsche analysis is extreme bear case this impacts 27% on earnings. ie not going broke but major hit to earnings - but this is assume nothing else happens (cetris paribus) both in terms of companies strategy and in the industry. Which does anybody really believe given history of the company and changes happening in the industry. Deutsche analyst after stating the extreme bear case the caveat that SGH has a history of reacting well to regulatory changes and indeed even benefiting from them. Hmmm...This is where I refer to point 3 .
3. Article by Chris Merritt in today's weekend Australian helped me think through this point above. As article notes "when the dust settles, Britain's changes might have the same effect as Australia's - weak law firms abandoned personal injury as it became too difficult and less lucrative." As what the article highlights was Australia's own reforms in this area slashed the level of civil litigation by 43,000 cases in 3 years, which placated the insurance companies. But then as the article reminds us - this is where SGH prospered as this effectively handed them market power as market consolidated where they listed, gobbled up competitors and now has 25% market share of Australian market for personal injury law. This then brings me to point 4.
4. One of the reasons for PSD acquisition by SGH was that the market was ripe for consolidation given very fragmented market with lack of innovative large players in the market. What the legislation does (if approved for as noted they have tried numerous times to get this legislation through - last time in 2013 as I understand it) is it will just accelerate the pace of industry consolidation. Given their past Australian success when had similar negative regulatory changes that SGH ended up benefiting from via industry consolidation this accelerated, I think again SGH from long term perspective stands to be again a major beneficiary and winner in the likely industry consolidation this legislation will accelerate if passed. That then brings me to point 5 in support.
5. Poignant bit in article by Chris Merrit which reinforced my own interest in SGH's entry into UK and reasons why from long term perspective would be successful (and why initially considered possible super fund investment) was this bit "It is worth keeping in mind what Slaters said in its annual report about the Australian and UK markets. "The momentum for further consolidation in both markets remains strong and the group is well placed to take advantage of that trajectory given its position, brand strength and strength of offering". And as article concludes: "When the dust settles, people will still need personal injury lawyers. And Slater's will still be there." Which brings me to my final point 6.
6. Slaters has already proved with the Australian market it can adapt and indeed benefit from regulatory changes as shown there will be winners and losers in the industry from this. SGH already has the proven pedigree through their experience to emerge as the winner in Australian market consolidation from legislation changes. As article by Chris Merritt also highlights - the UK market been behind Australian market and "analysts are saying that the changes are intended to create a statutory compensation scheme that is similar to Australia's " So given SGH brings its success in being a big winner out of Australian industry consolidation driven by legislation changes - why would anybody not bet on them bringing this experience to also emerge as long term winner and beneficiary from UK industry consolidation. And note if legislation is passed this will accelerate this industry consolidation. Hence, for me, short term speed bump but long term plays to SGH's strengths to my mind.