Queensland-based solicitors Shine Corporate Ltd (ASX: SHJ) this morning announced it has received a favourable ruling from the Australian Taxation Office that will see it generate income tax benefits of $19.3 million.
The ruling relates to the availability of tax deductions arising from the group's restructure prior to a public listing in 2013. The group's $1 initial public offer price back then looks a bargain now with the stock sitting at $2.60 on a market value around $448 million.
Shine largely operates in the world of tort law, a practice area with a focus on personal injury (PI) cases. This kind of work tends to be high volume and low margin where costs need to be controlled tightly. It's also a competitive sector with many law firms offering 'no win no fee' deals with potential for common law actions for damages to be gradually eroded by legislative reforms.
Shine has similarities to fast-growing rival Slater & Gordon Limited (ASX: SGH) as its management cottoned onto the fact that growth in the competitive PI sector is dependent on developing core competencies and competitive advantages.
A strong brand awareness, good reputation, solid success rates, access to capital, and efficient case management systems chief among them.
Shine has also copied Slater & Gordon by pursuing an acquisitive growth strategy and has so far taken a more conservative approach compared to its larger rival.
Slater & Gordon's recent expansion into the UK now under the microscope after the group agreed to pay $1.2 billion for part of UK-AIM listed business Quindell Plc.
For the most recent half-year period Shine posted revenue growth of 29% and normalised earnings growth of 24% over the prior corresponding period. The company has guided for full year earnings to be in the region of $42.5-$47 million.
If you annualise the normalised earnings per share of 8.24 cents for the first half of the year the business is trading on around 16x earnings when selling for $2.60.
This looks around fair value given the risks around the competitive environment versus the potential to organically grow into other personal legal services practice areas in particular.
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