Morningstar fair value, page-8

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Recommendation: Hold

Slater and Gordon is a consolidator of the fragmented legal services profession in both Australia and the U.K. It benefits from strong brand positioning in Australia, with a leading market position in the personal injury space. Top-line growth is driven by the core Australian personal injury business, diversification into general legal services and an acquisition strategy in both Australia and the U.K. The acquisition of the professional services division, or PSD, in early 2015 made the company the largest law firm by market share in the world. However, despite Slater and Gordon's strong brand recognition and national footprint in Australia, these are not sufficiently developed competitive advantages to warrant an economic moat.

Analyst Note
Slater and Gordon Recommendation Suspended As Uncertainty Rating Increases to Extreme
Slater and Gordon reported a disastrous result, albeit widely anticipated, for the six months to December 2015 with statutory net profit after tax, or NPAT, after minorities falling from a AUD 49.3 million profit in the prior corresponding period, to a AUD 958.2 million loss in the current half. The huge loss was mainly a result of an AUD 876.4 million impairment of goodwill, 94% of which was attributable to the United Kingdom-based businesses. However, even underlying NPAT, which excludes numerous one-off adjustments such as impairments, was a loss of AUD 42.1 million. Underlying EBITDA before changes in work in progress, or EBITDAW, a proxy for cash flow, was a loss of AUD 17.8 million, well down on the AUD 32.6 million profit in theprior corresponding period. The company is tracking below management's prior fiscal 2016 guidance, which was withdrawn in mid-December 2015, of AUD 205 million. Slater and Gordon did not reinstate fiscal 2016 earnings guidance and will not pay an interim dividend. Given the extremely wide range of potential financial and hence valuation outcomes as discussed above, this has led us to increase our fair value uncertainty rating from Very High to Extreme, which effectively suspends our recommendation on the stock until we have more earnings clarity.