I have spent a fair amount of time going through Michael West's article and I think that Simon Morrison gave a reply that was more than adequate and have no issue with SHJ not responding in more detail. The below is just some commentary on this and I will continue to hold my shares.
(Just to clarify, while I have a finance and accounting background, I have no actual experience working in a law firm and have no connection to SHJ other than being a shareholder.)
The article has this summary of the issues:
There are eight red flags that indicate investing in Shine at current prices may result in a personal financial injury. The red flags are discussed in the remainder of this report as follows.- Shine’s low PE ratio,
- earnings unmatched by taxable profits and operating cash flows,
- dubious accruals look like earnings management,
- dubious quality of sales and net income,
- questionable work-in-progress,
- questionable operating cash flow disclosures,
- accounting for intangible assets,
- revenue recognition.
I am not sure how much of the article was taken straight from the anonymous author of the investment report, but some of the points that they are trying to make, I feel, are poorly argued. I think the anonymous author is staying anonymous for a good reason - they are showing that they may be good with numbers, but they are not good at understanding financial statements, have little understanding of the reality of running a large business or the the way a law firm works. They don't understand how revenue is reported or how long it takes for actual cash to come in to the business. If I am misunderstanding their argument, it is because of how poorly it is set out and being argued,
I went through and answered each point in detail, but it turned out much longer than I suspected and mostly came back to the same point. That point being the author just misses the point, is not understanding who the numbers interact, is focusing on something that is irrelevant or not material or a combination of these.
The first "red flag" is a good example. So what if there is a low PE, correlation is not causation. That is no really SHJ's fault and hardly a red flag.
Number 2, 3, 4, 5 and 8 are all essentially from the same process. It is WIP (and by default, Revenue) and the author has little understanding of how SHJ recognises this. The author has a number of tables that really don't show anything interesting other than trying to jump to conclusions and using 10 years of data. I don't know why 10 years of data is being used, as things have changed significantly since 2017. The author never mentions income tax losses being carried forward from prior years. They also compare to Slater and Gordon a couple of times, which I find unhelpful and irrelevant.
Every shareholder should be aware about the WIP and the problems of the past and what could happen in the future and this article does not make any progress on this. This is the major issue that will cause any problems with the accounts and results. But, given this fact, I am sure that the Board and Management spend significant amounts of time to ensure that there are processes, systems and checks in place to ensure that this continues to be reported correctly.
The author using the terms "dubious" and "questionable" doesn't really add to their argument. Either there is a problem they have identified and is a concern, or there isn't. While on the face of it accounting may be very black and white, there is still room for a lot of grey. Points 6 & 7 really doesn't make much of an argument. They may or maynot be correct, but they are not material and the numbers are in the accounts clearly.
It should also be noted that Simon Morrison owns around 25% of SHJ. That is not a small amount and he is incentivised to keep SHJ a great company and not do anything that would bring the share price down or jeopordise the future of the company. While he is paid a good salary, I don't think it is a crazy amount. Stephen Roche owns another 25% of SHJ. So between them they own 50% of SHJ.
I think this article (and the anonymous investment report) are just shaking the tree and hoping that something falls out. This is not to say that this is or is not something will not go wrong within SHJ. As I said, WIP and Revenue are a major concern and this is where problems will happen. I tend to think that this is the major reason for the low PE - "the market" is marking it down to prepare for any issue. If something unexpected does happen, the share price will surely drop in the short term also. But currently on a trailing PE of under 5, this is leaving plenty of room for improvement. I have said previously about SHJ that I am happy to be a holder at this price and the longer that management can string together solid and consistent results, the better it will be for the company and therefore the share price.
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