Slater & Gordon falls on open as more investors lose faith Date...

Slater & Gordon falls on open as more investors lose faith

Date
June 30, 2015 - 11:40AM

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Jonathan Shapiro and Sarah Thompson

Slater & Gordon managing director Andrew Grech is facing mounting questions about the company's accounting policies. Photo: Josh Robenstone
Slater & Gordon shares have fallen a further 2.5 per cent in early trade as more investors grow fearful that the company will reveal further accounting errors.
Shares in the beleaguered law firm opened at $3.36, almost 12 per cent lower than Monday's closing price of $3.78, after more questions were posed about the accounting policies of the ASX-listed law firm.
The shares have since bounced to trade at around $3.68
The analyst community's reaction to revelations of the accounting errors and confirmation of an investigation by the Australian Securities and Investments Commission have been mixed.
UBS analysts said Monday's revelations brought into "question the accuracy of the company's historic financial statements and reinforced concerns over the relationship between revenue recognition and cash flow".
"Until the findings of ASIC's investigation are provided, forming a view on underlying earnings and valuation is challenging," they wrote.
Deutsche Bank analysts maintained their "buy" rating on the company "notwithstanding the near-term risks associated with the ASIC queries and the disappointing accounting errors".
CLSA analysts said their downgrade to underperform "reflected our concerns around potential regulatory risks in the UK and the lack of cash flow that will be produced by Quindell for a variety of reasons in 1H16".
The downgrade was not related to the accounting issues, it said, but added there was no reason to change its outlook, given the uncertainty.
On Monday a presentation from Sydney hedge fund VGI Partners that had shorted the company's shares since late 2014 emerged, citing key red flags relating to the company's revenue recognition and audit process.
On Tuesday it also emerged that top-performing Australian equities manager Fidelity had become a substantial shareholder in Slater & Gordon, acquiring 1.6 million shares between June 23 and June 25, taking its stake to more than 5 per cent. Rough calculations based on the ASX filings show the shares acquired on those three days have declined more than $3 million in value.
The five-day, near 43 per cent fall in the share price of what has become a core holding for small-cap fund managers couldn't come at a worst time – just a day before half-year fund performance numbers are signed off.
Shareholders are also awaiting news from the UK where Quindell, the UK listed firm which sold its professional services division to Slater & Gordon in March for $1.3 billion, is expected to release its revised financial statements.
On Monday, Quindell said it would miss the June 30 deadline to file its revised accounts without giving a reason. While the accounts, which are expected to be revised to reflect aggressive accounting of the UK firm, are only of historic significance to Quindell shareholders given it has sold its businesses to Slater & Gordon, investors in the Australian law firm will be looking for further insights into the earnings quality of the business it has acquired.
The revised financial statements are also expected to include details of related-party transactions on acquisitions completed by Quindell in the months before it collapsed in value, leading to Slater & Gordon's interest.
A UBS analyst said a "key issue for investors is whether there are any significant discrepancies with respect to Slater & Gordon's due diligence and its own accounting policies used in valuing the acquired assets versus the findings of the Quindell investigation and Quindell's view of the Professional Services Division's (PSD) assets".S