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Changing from court suit to C-suite
Veteran lawyers pitch a business case for soon-to-be-listed Zico Holdings

Anita Gabrielanitag@sph.com.sg@AnitaGabrielBT
BT_20141031_AGZICO31_1345605.jpg Mr Chew: "We are not (just) a Malaysian company... we are an Asean company."
31 Oct5:50 AM

COME Nov 11, Zico Holdings, a firm that rides on the brand of famed law firm Zaid Ibrahim & Co or Zico that began atop a bicycle shop in Kuala Lumpur in the late 1980s and built a respectful reach across Asean from its regional office in Singapore, will make its debut on
This is Zico's closest comparison in the Asia Pac region. However, Zico is well backed by high profile M'sian Godfathers and currently trades way above SGH's valuations.

As usual when there are good IPOs, the level of playing field is not level - no public tranche during recent IPO exercise... why...



SGH: classic roll-up or float pioneer?
Jonathan Shapiro
1321 words
17 Nov 2014
The Australian Financial Review
Copyright 2014. Fairfax Media Management Pty Limited.
When Melbourne lawyers William Slater and Bill Gordon formed a legal practice to aid union workers they would never imagined that 85 years later it would become a $1.3 billion ¬corporate juggernaut lauded by the stockbroker community.
Since Slater & Gordon became the first law firm in the world to float on the stock exchange in 2007, the share price has soared as it corporatised the sleepy industry of "no-win, no fee" compensation and class action law.
Local investment firms, such as ¬Wilson and Perpetual, that have embraced managing director Andrew Grech's sharemarket adventure have been well rewarded as the firm has ¬harnessed its access to capital to embark on rapid-fire expansion in ¬Australia and Britain.
On Friday, SGH closed near a record high of $6.39, implying a market -capitalisation of $1.34 billion. Over a two-year period alone the Slater and ¬Gordon share price is up an astounding 234 per cent, out-pacing the 23 per cent gain in the All Ordinaries by 10 times.
The firm's success as a "consolidator" has encouraged other law firms to replicate the model. Brisbane firm Shine floated with the help big tobacco slayer Erin Brockovich in 2013 and this week Spruson & Ferguson, a patent law firm is preparing an initial ¬public offering.
SGH is one of Wilson's largest ¬positions and portfolio manager Matt Haupt believes the stock could rise above $7 as it seeks to double its share of the UK personal injury claims market and expand into other general areas of law. What the market loves most about Slater is the ability to deliver something increasingly rare: double digit earnings growth.
Since floating, the company has increased earnings by an average of about 28 per cent and, as such, trades at a 17.5 price-to-forward-earnings multiple; a high valuation, but cheap to some, considering its pace of earnings growth.investors seem to like the company
Better yet, it's a "non-cyclical" or even "counter-cyclical" stock (compensation claims often rise in a weak economy).
Small fund managers that are either tired of stressing about volatile ¬commodity prices or put off by hefty multiples attached technology high-¬flyers have gravitated towards the stock.
In fact, investors seem to like the company more than management, with filings showing Grech and other key executives have on aggregate reduced their stake from 27 million shares to below 20 million over the past two years.
By all accounts, Grech and his firm has perfectly executed an expansion strategy taking full advantage of ¬regulatory changes in Victoria and ¬Britain that have made compensation claims more procedural in nature.
The firm has acquired aggressively and spent heavily on advertising to build a brand. This has allowed it to scale up, and bring corporate efficiency to a cottage industry littered with small-time lawyers that haven't got the best reputation for commercial acumen.
But is there more behind the stellar growth story? A well-defined strategy of acquiring businesses has some observers branding Slater & Gordon a classic "roll-up", the likes of which are common in the Australian market.
But for professional services firms, they haven't always ended well.
In the last five years, the company has spent $300 million buying up 35 firms in Australia and Britain. In recent years, Britain, a market five times larger than Australia, has become Slater & Gordon's strategic focus looks to double its market share of various legal segments.
The consolidator strategy has helped to grow the firm's earnings, but some sceptical analysts are questioning the quality of earnings growth and fear SGH's acquisition-driven growth model is unsustainable – especially if it is ¬unable to grow underlying earnings in the absence of acquisitions.Scepticism
The bear case for Slater is that to maintain its pace of earnings it is ¬consigned to making ever-larger ¬acquisitions that it will push its ¬financing capacity to the limits.
The basis for the scepticism lies in a stark divergence between SGH's reported net profit and its free cash flow since it went public in 2007.
Charting the cumulative net profit shows an impressive rise from $3.9 million in 2007 to $222 million. But cumulative free cash flow – accounting for acquisitions – has gone the other way. A net amount of $158 million of cash has left SGH since it listed, despite the strong earnings growth. The free cash flow metric is used by analysts to gauge the ability to generate sufficient cash to fund future growth and would suggest capacity limits ahead.
Another telling aspect of Slater & Gordon's accounts may be the amount of cash it has paid to the tax office since it floated. While the firm has reported steady earnings growth, it has hardly paid any tax – just $20 million since the company floated and just $10 million in the past four years, against earnings of about $155 million.
The firm, which regards access to capital as its opportunity to drive ¬industry consolidation, appears ¬confident it retains the financial ¬fire-power to make more acquisitions.
Management believes it has both the debt capacity – the board is comfortable with a 40 per cent bank debt-to-equity ratio, compared to the current 24 per cent level, and the ability to generate sufficient cash.
A key part of understanding Slater & Gordon is the nature of its largest asset, "work In progress", which is $470 million of assets on its balance sheet, up from $300 million in 2013. WIP is the accounting term for work that has been partially completed but where payment only occurs on completion. WIP allows companies to account for the value they have generated from a project or case, based on time to ¬completion and likelihood of payment, and for a firm that runs a "no-win, no fee" model, changes in WIP are an ¬integral component of its earnings.A dangerous game
But it's a subjective measure. To paraphrase Morgan's analysts initiation report, WIP involves "trust me accounting" that some believe gives ¬Slater levers to pull in representing its earnings and in accounting for acquisitions.
The next reporting period will ¬provide vital signs as to the quality of Slater & Gordon's earnings. So far 2014-15 has been an acquisition-light period, although two small Australian ¬purchases surprised analysts.
For now, Slater & Gordon's ¬strategy appears well on track .The 2015 ¬revenue forecast of $500 million is up from $418.5 million but suggestions and analysts who have unanimously assigned "buy" recommendations on the stock, think that target will be ¬easily exceeded. But there are enough cautionary tales of failed consolidators in the ¬professional services space to keep the enthusiasm in check.
They include, ironically, a liquidator, Knights Insolvency. Another, accounting firm Stockfords, deployed a ¬business model The Australia Financial Review columnist Anthony Hughes described in a 2003 post-mortem as "buying accounting firms at prices small accountants had never before seen and merging them to save costs and develop a national brand".
Slater & Gordon backers would scoff at such a comparison and point out key differences. SGH is not reliant on key clients or key staff.
As a consumer-facing firm, it regards its key assets as its brand, its systems and processes, that can't simply walk out the door. This, after all, is a pioneering law firm that has given access to ¬justice, not just to its clients but to delighted share-market investors.
Management attests the firm is ¬substantially better as a result of the governance rigour that comes about from being listed. As it steps up its UK ambitions, it will either dispel the notion sharemarket-fuelled consolidation is a dangerous game for lawyers and accountants to play, or prove it unequivocally.

Fairfax Media Management Pty Limited

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