Shares in tort and general law firm Shine Corporate Ltd (ASX: SHJ) look set to plunge after the company shocked investors when it said to expect a material reduction in financial year 2016 earnings guidance.
Shockingly, the downgrade is related to accounting issues and specifically a "review of its work in progress (WIP) recovery rates and provisioning".
The work in progress is treated as an asset on the balance sheet although due to the many variables impacting claims for negligence under the law of tort (and notoriously long time lengths to settlement) it appears Shine has been forced into reconsidering its 'work in progress' provisioning.
This news is likely to rattle investors given the problems suffered by rival operator Slater & Gordon Limited (ASX: SGH) over work in progress booking, accrual accounting, and cash flow generation.
Slater & Gordon has seemingly many more problems than Shine, especially regarding its expansion into the UK, but Shine investors are likely to sell first, ask questions later, unless the company delivers only a marginal downgrade and much reassurance to shell shocked investors.
Last October, Shine forecast to expect full year EBITDA in the range of $52 million to $56 million and announced that net WIP and disbursements as assets on the balance sheet increased by $67.3 million – reflecting both organic growth and acquisitions.
Slater and Gordon continues to have its accounts investigated by the corporate cop ASIC, while today's mea culpa from Shine is likely the result of an internal review undertaken in order to avoid any further problems down the line.
Despite Slater & Gordon's issues, Shine remained a popular story with many institutional research houses.
In late October the Australian Financial Review reported that Bell Potter described it as "attractive" with a $3.55 price target, while it now sells for $2 and looks likely to fall heavily when exiting its trading halt.
Elsewhere, Perpetual Limited (ASX: PPT) appeared on the register as a substantial holder in Shine in late December, with a 5.01% ownership interest. Today's news is likely to come as a blow for Perpetual Investments given that its flagship Australian Shares Fund is already down nearly 14% over the past year and down 5% over the past three years.
Today Perpetual shares are down 1.4% to $39.90. None of the businesses mentioned in this article look investment grade in my opinion.
