Law firm Slater & Gordon Limited (ASX: SGH) today posted a half-year net profit of $33.7 million on revenues of $245.3 million for the six months ending December 31, 2014. The net profit and revenues were up 46.5% and 37.6% respectively, compared to the prior corresponding period (pcp). In response the stock has lifted around 3% in morning trade to $6.80.
The group maintained a respectable normalised EBITDA margin of 23%, this is a key measurable as the firm's main operating expense is staff costs and fee-earning lawyers are well-known for their love of big salaries and bonuses.
The margin is likely normalised to reflect the fact that Slater & Gordon will have taken on significant one-off costs over acquisitions completed in the six-month period.
Net debt stands at a $161.9 million, which is another key metric as Slater & Gordon's meteoric rise has partly been the result of an acquisitive roll-up strategy.
For a roll-up strategy acquisitions should ideally be funded from profits, but issuing equity or taking on debt are common alternatives, which bring with them dilution and balance sheet risks to be watched.
Australia
The group said its Australian personal injury practice continues to prove resilient with both it and other general legal services such as conveyancing, estate planning and family law seeing steady growth.
Revenues from general legal services are expected to grow faster than personal injury services and the business also snapped up two small Australian rivals in October 2014.
For the period, total revenues for Australian operations were $127.7 million, with earnings of $30.6 million on an EBITDA margin of 24%.
Slater & Gordon operates in a competitive Australian market, with rivals like Shine Corporate Ltd (ASX: SHJ) also fighting for business. However, there should be plenty of work to go round, with strong underlying demand for legal services that are generally resilient to economic downturns.
The UK expansion
The real growth driver has been the roll-up strategy executed in the giant UK legal services market. Today Slater & Gordon announced the acquisition of two more small law firms for a total of £18.7 million to be funded by a mix of cash and equity.
The business is also reportedly interested in the legal assets of struggling AIM-listed UK business Quindell.
The UK acquisition strategy still carries significant execution risk as lawyers are known to be strong willed and integration into the Slater & Gordon model would be a challenging task, although so far the business appears to have delivered and will learn from experience.
Revenues and earnings are now roughly split equally between the UK and Australia, with the company likely benefiting in the year ahead from the British pound's appreciation over the RBA's trampled-down dollar.
The company is also investing in building its brand strength in the UK through heavy advertising and innovative strategies.
Brand strength and relatively low-cost services look a winning combo and the group confirmed it expects to bring in total revenues of $500 million in financial year 2015, with an exchange rate tailwind perhaps set to accelerate the revenue growth.
A dividend of 3.5 cents per share was announced, up 16.7% on the pcp, indeed growth stocks that can continually increase their dividends tend to deliver the best returns over time.
