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Slater & Gordon – update as hopefully warning was heeded - it is going to get worse

By Tom Winnifrith & Steve Moore | Tuesday 14 July 2015

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from ShareProphets). I have no business relationship with any company whose stock is mentioned in this article.

First the polite Steve Moore, the rather more brutal TW to follow. SM: Towards the end of last month I noted that as Quindell plc (QPP) had been in the news, the acquirer of its Professional Services Division, Slater & Gordon, had been in the spotlight in Australia – S&G eventually admitting that the Australian Securities & Investment Commission had been in contact with its auditor, though that “we remain very confident in the robustness of our accounting practices”. Hmmm…

I concluded (see HERE) with some general words of investment wisdom from Warren Buffett and hopefully these were heeded as just days later shares in S&G crashed as the company informed that it had been notified that the Australian Securities & Investment Commission “intends to raise some queries” and that, having commenced a detailed analysis of the financial information to be provided to the Commission, two errors in the method used to report receipts from customers and payments to suppliers and employees by the UK business had been identified.

The company emphasised that “net operating cash-flows, as reported, remain unchanged”, with it to provide a further update to the market this month regarding an assessment by Ernst & Young of its responses to queries raised by the Commission.

I previously suggested that the acquisition of the division from Quindell in conjunction with previous rapid acquisitive growth and vast amounts of intangibles, work-in-progress and receivables on the balance sheet meant reasons for caution and the recent developments look to offer very little reason to be very confident in the robustness of the accounting practices here.

Warren Buffett stated “never invest in a business you can’t understand”. With the company itself seemingly struggling to understand the vagaries of accounting for its business, how can the outside investor hope to? As usual, I’d follow Buffett’s advice here. 

TW: Shares in Slater & Gordon peaked at A$7.95 after the Quindell deal was announced. It raised cA$900 million in fresh equity to fund the transaction at A$6.37 a share with mug punter institutions lapping it up. The shares are now $3.50 so what happens next?

In terms of the stock price it is still way overvalued? S&G’s accounting practises look dodgy and are under review. That is bad enough. There is a potentially huge fine coming its way from the ATE mis-selling scandal (see HERE) but above all its valuation is insane.  At A$3.50 the market cap is cA$1.3 billion but there is also debt on top of that of cA$450 million.

The core S&G business might just generate free cashflow of A$75 million in the year to June 30 2016 but with the added debt from the Quenron deal shall we call that A$50 million. But the Quindell businesses have never generated cash so the group number is going to be somewhere between 0 and A$50 million – in other words this stock is now on a free cashflow multiple of 35. And that is for a business going ex-growth, with a potential nightmare ATE liability and which – if the Quindell businesses really tank – might even struggle to make interest payments.

This stock remains a stonking sell. It may have halved but it could well halve again.

History shows that if a listed company buys a Rob Terry fraud it ends up the loser. Check out the way Terry brought down Canada’s Lava Systems in the late 90s after it paid him cash for his SCS business only to find that its projected revenues were largely bogus. Lava went tits up within a year. How Terry avoided jail time for that remains a mystery.

At what point to the thick as shit institutions who supported the S&G placing cry foul and consider a class action citing both S&G’s own accounting “issues” but also its consummate lack of due diligence in paying so much for the Quindell shite?  Will it be when the UK’s Serious Fraud Office and FCA lay bare the scandals at Quindell? Or perhaps when Rob Fielding, the ex CEO of Quindell who now heads up the businesses S&G bought is led off in cuffs – much to the dismay of HR manager Mrs Jill Harrison – over the £2 million bung he got from Quindell when it spunked away £30 million buying a worthless business from convicted Nigerian fraudster Andrew O’Dua? Or perhaps when Slater shares slump below A$2 as they surely will.

Anyone who took part in the S&G placing was mugged. Surely they will seek restorative justice at some point?

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  1. Daniel Victor

    I’ve seen quite a few Slater and Gordon ads on the telly recently.No idea whether that will pay off for them.

  2. Claims Specialist

    I think you will find that the organisation who gave the advice to pay ATE premiums at a higher level than necessary i.e. QPP, will be held responsible for the mis-selling and thus be liable for fine/repayment.

    However, if S&G continued the process then they too will have a problem.

  3. The organisation responsible was QLS ( now sold to S&G) not QPP PLC. I think it is far less cut & dried as to who picks up the tab – if there is one – than you imply.

    If QLS is fined for historic crimes what warranties did QPP give?


  4. Regarding the ATE article linked to above, claimants were paying £245 for ATE for RTA cases, which were the bulk of cases. So a bit excessive maybe, but not £425. Only 17k and 37k QLS RTA cases had settled in 2013 and 2014 (Slater presentation), and the ATE premiums are only paid by the claimant upon successful settlement. Any fine, whether SGH or QPP have to pay it, will not be remotely as high as £75m. I’d be surprised if it was even double digit £millions.

  5. Pauly Walnuts

    The ATE premiums may only be ‘paid’ on successful settlement, but they are most definitely signed up by the claimants on inception. Quindell were boasting of 10,000 rta cases per month in mid 2013 so regardless of the Slater presentations there appears to be a major potential banana skin for either QPP or SGH here.

  6. I don’t know where you got 10k RTA cases per month in 2013 from. I’ve never seen that in any of the investor documents. Possibly this was a future projection or a mid 2013 quarterly not monthly figure. Or you may be thinking of the June 2014 QLS slides (no longer available) where all RTA case types were to be cut from H1 14 levels to c.8 or 9k per month (they seem to have actually cut intake even further than planned in H2 to save cashflow).

    In any case the same May 2015 Slater presentation I referred to earlier says (slide 22) that RTA case intake was 54k cases in 2013 (but some of those pre-LASPO) and 80k cases in 2014 (and only a majority of those will be low value RTA portal were the ATE premiums are most questionable). That fits within the QPP 2014 interim slides which have all case type intake numbers of 60k for Q2-Q4 2013 and 82k for Q1-Q2 2014 (when the proportion that were RTA reduced). Of course there will also be a few 10s of thousands of RTA from Q1 15.

    I only heard this 2nd hand but David Currie was asked about the ATE issue at the EGM and said he thought any fine would be in the £2 to £5m range (I don’t know who he thought would have to pay it).

  7. Pauly Walnuts

    The 10,000 cases per month figure was from the August 2013 investor presentation, page 25 QLS.
    It may no longer be on the website but I downloaded a copy.
    The part referring to it is here……

    Quindell Legal Services, after significant contract wins in 2012 and HI 2013 now processes circa 1-in-5 claimant claims in the UK.
    Based on Run Rate of c.10,000 volume in Order in-take in July, the potential run rate
    for HII is c.60,000 revenue earning cases with a correspondent Waterfall Effect of addiPonal revenue for Quindell Health Services.

    So what your saying is the total cases for 2013 were actually less than QPP said H2 would be.
    Maybe that’s one of the public statement the FCA are looking into.

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