WIP has a corresponding future tax liability of over...

WIP has a corresponding future tax liability of over $100M??????WIP is already billed just not paid.

The WIP grows because they are doing more work on open and new cases then they are closing, which is great and shows they are growing strongly remembering old cases settle at $1for $1 less actual write-offs and all new cases are pushed in WIP at only 82c per dollar

The WIP provision is how much of the work completed does SHJ think they will get paid for.

I am going to rough this out a little but lets say WIP is an even 400M gross, which on my guesstimate is probably near dead on right now. This is cash owed to the company if they win every case. But they don't win every case, so they don't get paid the entire 400M even though they have already completed 400M of billable work.

Best guess on how much of this 400M they expect to recover comes from historical provisioning amounts (18-20% recently) and future tax liabilities (>$100M). Actually that is not phrased correctly the 18-20% is not IMO how much they expect to recover, I believe they will expect to recover much more, so what we see is the Net provisioned amount based on safety, robustness and how much they can get away with and still remain compliant with accounting standards, audit and compliance requirements etc etc. SHJ won't tell us the actual write-off rate as it would be commercial in confidence, but they did in the prospectus claiming after decades of doing similar the write off is roughly 9c in every dollar billed, a similar tune was sung by S&G.

It is the middle ground between ACTUAL PERFORMANCE and WIP PROVISION where 'discretion' comes into it and this has a HUGE effect on the tax/profit/NTA.Assuming WIP recovery has remained static at 91c in the dollar:
1) From work already done SHJ will recover $364 M of $400M bill.
2) However the company based on its last provision of 18c, i.e 82c in the dollar has only assumed $328M payment of the $400M bill and created its future tax liabilities/NTA/Profit from this.

This leave $36M of potential (historically almost guaranteed) profit which can be recognised at any time, up to the limit of what the auditors would allow of course, but I think they would allow 90c in the dollar recovery rate and I would be surprised if this is not close to what Slater and Gordon operates off. This $36M does not exist in the accounts you see, it is not taxable or disbursable unless recognised with the stroke of a pen.

I think I remember from a S&G review some years back they use 92 or 93c, but anyone up for it should go on a fact finding mission, if you can find what S&G use, which is approved by its auditor ( my guess 91c) then the question to SHJ becomes why 82c. The books are comparable, SHJ is playing the game better so why??? This simple answer IMO is because they can and why wouldn't they, the only regulation of this is shareholders pressure, upto a certain point there is no governing body who will scold them, the auditor will pontious pilate every time, it is only the shareholder who can demand the 82 becomes 85 to 90.

Every 1c SHJ put into additional provisions takes $4m profit from the existing or historical periods and holds it off for future periods, it pushes it into profit purgatory where it will stay until sale day. Conversely every 1c reduction must be immediately realised as profit, taxed and either added to NTA or disbursed to shareholders.Without doubt at 82c the company is more robust, but IMO SHJ couldn't be any more robust then they are now, they are leaking robustness because the provision buckets are full. Thankfully, its hard to jam a provision into the 20c mark if its double what's required without inviting the ATO in so there is a limit and I feel we have reached it a 82c, but this still means for every dollar billed today 8c disappears for a long while, which when you have a company profiting roughly 30c in the dollar billed is a lot, in this scenario profit is shown at only 3/4s of actual.

The govt would not be happy with them running exactly at historical averages because a souring of actual from 91c to 90c recovered would hit the company for $4m which could cause bigger problems, but how far do they need to go in being safe????

Personally I think 18% in provisions was way too high, but if they keep it consistent profit at this rate is forced out no matter what, its just the profit left in suspended animation continues to grow, Kept from the NTA, Kept from the ATO, Kept from the Share holders, put into an invisible bucket that won't be touched until sale day. One thing I personally take for granted- If this $400M WIP book got sold today it would be for $364M not $328M as it is the true value of the asset based on historical averages. If you are lucky enough to be holding on sale day well done you, but if not then you only got to see part of what the company was making, part of what it was truly valued at which is not fair. Having said that you can't help but be thankful for how good SHJ actually is at making money, growing, and how solid this business is, I just hope the market one day realises it.

My best Guesses

Actual Recovery of Gross WIP 91c in $1 for both SHJ & S&G ( At worse I think I am max 2cs off in either direction 89-93)
SHJ accounting 82c
S&G accounting 90c

Fair to shareholders, Fair to future/robustness, Fair for all concerns I believe is 85c which SHJ operated on for some time in the accounts
The only way for 85c to return is for pressure to be applied, which I can't see working this HY as it is already a bumper for profit, remembering if the board ever agreed to this it will automatically release $12M of our profit. ($3.5m in tax, almost $3.5M in divi and $5M in NTA)