The Slater & Gordon Limited (ASX: SGH) share price fell 10% after this morning's results release, with the business reporting another loss and cash outflows. Here's what you need to know:
- Revenue fell 32% to $331 million
- Net loss after tax of $425 million including impairments
- Underlying net loss after tax of $37 million
- Total cash outflow of $23 million
- No dividend
- H2 priorities are establishing a recapitalisation plan with lenders by 26 May 2017
- Continue restoring earnings and cash flow
- $57 million cash at bank
So What?
I love an underdog story as much as the next person, but Slater & Gordon's results make it a very difficult company to get behind. The key metrics that investors were looking for, specifically cash flow and Earnings Before Interest, Tax, Depreciation, Amortisation and changes in the value of Work in progress (EBITDAW), although improving, were nowhere near good enough.
The company lost another $22 million in total cash outflows during the half, leaving it with just $57 million remaining. Lawsuits continue against Watchstone to recover a further GBP50 million held in escrow, but the ultimate results of that proceeding are uncertain.
On the business front, Slater's operations also continue to struggle. Australian fees received fell by 18%, UK fees fell 37%, and Slater & Gordon Solution (SGS) fees fell 40%. Management also reported that staff turnover and negative sentiment were affecting the UK business – which suggests that negative publicity and the company's financial situation are disturbing staff and customers. This is a very bad sign, as law firms are built on both people and reputation.
Now What?
Significant shareholders and buyers of Slater & Gordon debt were attracted to the company for the possible value contained in the profitable Australian legal segment. That segment alone is worth more than the current value of Slater & Gordon – which has a market capitalisation of ~$50 million – but the debt makes it a tricky issue.
While the group managed to post a positive 'normalised EBITDAW' for the first time in a while, it's not enough, and the company still went backwards in terms of lower revenues and cash outflows.
Given the deterioration in the Australian core business as well, I'm beginning to wonder if Slater & Gordon will actually make it to the recapitalisation stage, or if it will be wound up by its lenders. With all the issues, I consider Slater & Gordon to be extremely high risk and would avoid the company at all costs.
