How to Separate from SGH

Shine is not SGH. We know. Many of us bought these shares because of it.

However the reason that these shares trade at this price is mostly due to the soul destroying nightmare that Slater & Gordon has become.

The market may be "efficient" (or so the shorters tell me), but it's not smart, especially when it comes to new blood. Remember that law firms have only been trading on the ASX for a very short time, so those that don't trade on a retail bank's trading platform (but trade in the big money) don't have a long history of ins and outs to dictate their trading moves.

A lot of those people stumped up big money when SGH put out their hands at over $6.00 a share last year and got burnt big time. They're bitten and shy. So too are the myriad of smaller traders, many of whom have lost large chunks of capital.

So when there's another Aussie law firm dealing in the market, it cops the overspray. We saw it last year in a 40% SP drop to $2, in a year when, for Shine, things were going well. Guidance was met, new leadership was put on and successful firms were acquired. But the price dropped.

Then things, recently, got a little less sweet. The WIP caught up with the company (meaning that more cases were lost then the historical average: the 'run rate' of total cases v/s wins went down and thus the actual revenue coming in wasn't matching what forecasts said it should be) - some of the presentation language suggests too that there were some lower down employees who didn't work as hard as they should have. My bet is these are former partners of independent firms Shine bought out. They got their dough and stayed on as "consultants" - but unfortunately some of them may have stopped properly running their ships. Not saying that they simply were lazy: potentially the regime change brought about standardized processes that needed to be relearned (not easy if you've been doing things one way for decades and have to change).

Such things are a hindrance, but not a disaster. The company has told us that it has recognized these challenges, and has put to work procedures to improve the overall quality of the heavy lifters (aka "bench strength"). With more conservative WIP-to-success forecasting, these changes should easily have a positive effect on the PI side of the business.

But, we've now been priced as a disaster. We're down 75% on $2.00: more than that on the all time high. All on a going concern that has shown continual growth historically. We have to look through the hype and try to understand what's going on. All of those bitten by Slater's are now shy on Shine. They've sworn off the legal sector for good and made emotionally emphatic but logically false connections that karma is doing it's thing on "ambulance chasers." (The same people they'd be crying into the arms of if a drunk driver put them or someone they love into the ICU).

But we're not SGH. There's no massive debt or overseas anvils suspended above our heads. Shine has history in this country and a reputation. If you brought in someone who'd been in a coma the last year and looked at where we are in the market I think they'd be surprised at the bargain price.

And I think an even skeptical market can be persuaded. It won't happen overnight but there are ways to make sure this company is priced properly. Some of these points of difference seem to be being achieved. The market needs to be kept up to date - we don't want announcements weekly outlaying every virtue like a salesman, but what we're getting is good: clear, properly detailed and delivering understanding. I notice that SHJ takes the time to explain WIP in their announcements: we know therefore how it's done and can see that if there are problems it's in easily adjustable calculation rates rather than the entire concept itself (as some think). The use of a TH may not have prevented a price plunge but at least the market traded only when proper information was known. This builds trust.

What we look for now is a no surprises results update later this month. We want to have what we've just been told re-affirmed without vagueness in language or further whittling downgrades. Perhaps even a clue to say that indeed the latest forecasts have been properly conservative. This will bolster things further. To complete the cycle we need time and indeed the full year results. We need the dividend and we need the forecasted strong second half. As SH we need to remember fundamentals and ignore noise, but always keep as up to date as possible and not be too proud to change minds when proper evidence suggests we should.