Times Up For Slater & Gordon

We all know what happened, there’s no use tiptoeing around it. Last year Slater & Gordon [ASX:SGH] lost 87% of their share value. Most of which was lost due to a British court ruling about small damage claims. The court ruled the minimum claims limit was raised from £1,000 to £5,000.

The market has given SGH time to strategically sort out the problem. And an answer still hasn’t been announced. SGH’s share price dropped 15.54% this morning on open.  Nothing compared to previous drops but it has pushed shares towards their 52 week low of $0.55.

Slater & Gordon 280116

Source: Google finance

SGH Shareholders still left with no information

Once the British court’s decision was released, investors through it could affect SGH’s earnings. Why? Because SGH is a legal firm that has a high percentage of customers making small claims. However days after the decision was released SGH announced that their British operations were sound. And a disruption to earnings is unlikely in the not too distant future.

Yet, SGH were wrong. Weeks later SGH downgraded their earnings guidance. And it left shareholders in disbelief. Something that was thought of as so small ended up ruining their portfolio.

SGH had previously stated that they would provide an update on its gross operating cash flow. SGH had an opportunity to calm the rumours surrounding their financial position for the first half of FY16. But it seems SGH has let down its shareholders again.

All that was said was the company ‘continues to work with its auditors and advisors’. Earlier this month SGH announced help would be received by accounting advisory and insolvency firm, McGrath Nicol. The firm has been appointed as an advisor to the company’s lenders and will assess the situation.

Instead SGH will put off any statements about gross operating cash flow until 29 February. ‘The company continues to work with its auditors and advisers to finalise its half year results including statutory grow operating cashflow,’ SGH stated to the ASX.

Will Slater & Gordon pull out of their earnings rut?

Investors don’t seem to be confident in anything that SGH says. And I don’t blame them. If I was lied to by a firm I trust, my confidence in them would be wavering too. The new CEO, Andrew Grech, need to not only sort out SGH’s financial position. But their social responsibility as well.

Blatantly lying to shareholders, or just confirming information that may not be true is completely uncalled for. Once SGH’s share price dropped and the company told investors that earnings wouldn’t be affected. You can bet there were a lot of investors jumping into what they thought was a cheap stock.

Now reality has unfolded, a lot of investors have lost a lot of money.  It’s ‘now a likelihood’ that SGH could have a negative cash flow of up to $40 million. This is staggeringly different to what the company repeatedly reaffirms to be, $250 million.

Most analysts are claiming SGH’s projected number will be difficult to obtain, if not impossible. Adding to SGH’s pilling problems is the attention of ASIC (Australian Securities & Investments Commission). The Commission had questioned some of the financial reporting within the company.

However this is the least of their troubles. First they must rebuild trust with investors.

Härje Ronngard,
Junior Analyst, Money Morning


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