SLATER & GORDON LIMITED (SGH)

Transcription

1 Low Return High Financial Results 13 August 2014 SLATER & GORDON LIMITED (SGH) ACTION & RECOMMENDATION We upgrade Slater & Gordon to BUY from Hold. The FY14 result was stronger than expected with UK margin expansion the key highlight. Additionally, two small Australian acquisitions were announced. The outlook factors in strong organic growth but we expect additional acquisitions in the near term to supplement this growth. Opportunities exist to scale up smaller General Law practices or take market share in Australian PI. As the UK PI regulatory framework stabilises, there are also opportunities to accelerate consolidation. At the operational level efficiencies are expected from the UK, as the favourable case mix which drove margin improvement in FY14 is expected to continue. Results and roll-ups What s Changed This was a good result. NPAT of $61.1m beat WHTMe by 11.2%. UK was the highlight, with strong margin expansion and betterthan-expected revenue contribution from acquisitions. Australia was weak as legislative changes affected Queensland PI. However, we expect this to normalise and note the PI Practice excluding Queensland grew 9%. Cash conversion was strong at 90%, but was affected by one-offs. SGH also announced two acquisitions: a Victorian PI firm and a Queensland general practice firm with total annualised revenue of $39m. Outlook: FY15 group revenue is expected to be $500m, including the two acquisitions just announced. The EBITDA margin is expected to be 23-24%, and cash flow from operations >70% of NPAT. We expect SGH to make further acquisitions in the near term. The Australian PI market is only growing at 1.5-2% per annum and we expect SGH to take market share amid increased competition. In the UK, as the PI regulatory framework stabilises, opportunities exist to accelerate consolidation. Additionally, opportunities exist to scale up smaller General Law practices. We note the net debt to equity ratio will be c.24% post the acquisitions newly announced, leaving sufficient headroom for further M&A activity. UK margin improvement is expected to continue. The FY14 EBITDA margin of 24.9% was 304 bps above WHTMe, driven by a shift in practice mix from 15% multi track (complex injury) 24 months ago to c.35% today. We understand management plans to lift this metric further, which will drive further margin improvement. Risks & Catalysts Risks: 1) Regulatory change, 2) execution risk in the UK Catalysts: 1) Improving cash conversion, 2) new acquisitions. Year-End June (AUD) FY13A FY14A FY15E FY16E FY17E NPAT Rep ($m) NPAT Norm ($m) Consensus NPAT ($m) EPS Norm (cps) EPS Growth (%) P/E Norm (x) EV/EBITDA (x) FCF Yield (%) DPS (cps) Dividend Yield (%) Franking (%) Source: Company data, WHTM estimates, S&P Capital IQ 12m Target Price (AUD) $5.71 Share 12-Aug-14 (AUD) $5.24 Fcst 12m Capital Return 9.1% Fcst 12m Dividend Yield 1.6% 12m Total S holder Return 10.7% Daniel Wan, CFA daniel.wan@wilsonhtm.com.au Tel m Share Price Performance $ SGH XSI Rebased Jul-13 Nov-13 Mar-14 Jul-14 1m 6m 12m Abs. Return (%) Rel. Return (%) WHTM Return Re-Investment Matrix Share Price Risk Business Risk Cash Generator Challenged Champion Potential Low High Re-Investment WHTM Risk Assessment Low Med High Spec Key Changes 20-May After Var % NPAT: FY % Norm FY % ($m) FY EPS: FY % Norm FY % (cps) FY DPS: FY % (cps) FY % FY Price Target: % Rec: HOLD BUY Mkt Cap: $1,071m Enterprise Value: $1,166m Shares: 204m Sold Short: 2.8 ASX 300 Wgt: 0.1% Median T over/day: $2.2m Wilson HTM Equities Research Issued by Wilson HTM Ltd ABN Australian Financial Services Licence No , a participant of ASX Group and should be read in conjunction with the disclosures and disclaimer in this report. Important disclosures regarding companies that are subject of this report and an explanation of recommendations can be found at the end of this document.

2 PRICE TARGET Valuation Price Target WACC (%) 10.0 NPV Forecast FCF NPV Horizon FCF NPV Perpetuity Less: Net Debt DCF per Share 5.65 EPS 40.0 Market PE 14.5 PE Relative 1.00 PE Multiple (x) 14.5 PE Valuation per Share 5.78 TARGET PRICE ($ps) 5.71 KEY ASSUMPTIONS Year-end June (AUD) FY10A FY11A FY12A FY13A FY14A FY15E FY16E FY17E S&G Revenue TML Revenue SGH UK (RJW) Revenue Total Revenue Growth (%) EBITDA Margin EBIT Margin Cashflow Conversion (Adj Cashflow/EBITDA) % ROIC (%) ROA (%) ROE (%) INTERIMS ($m) Half-yr (AUD) Dec 13 Jun 14 Dec 14 Jun 15 1HA 2HA 1HE 2HE Sales Revenue EBITDA EBIT Net Profit Norm. EPS EBIT/Sales (%) Dividend (c) Franking (%) FINANCIAL STABILITY Year-end June (AUD) FY14A FY15E FY16E Net Debt Net Debt / Equity (%) Net Debt / EV (%) Current Ratio (x) Interest Cover (x) Adj. Cash Int. Cover (x) Debt / CashFlow (x) Net Debt (cash) / share ($) NTA / share ($) Book Value / share ($) Payout Ratio (%) Adj. Payout Ratio (%) EPS RECONCILIATION ($m) FY14A FY15E Rep. Norm Rep. Norm Sales Revenue EBIT Net Profit Notional Earn Pref./Conv. Div Profit for EPS Diluted Shrs(m) Diluted EPS (c) RETURNS FY14A FY15E FY16E FY17E ROE (%) ROIC (%) Incremental ROE Incremental ROIC PROFIT & LOSS ($m) Year-end June (AUD) FY10A FY11A FY12A FY13A FY14A FY15E FY16E FY17E Sales Revenue EBITDA Depn & Amort EBIT Net Interest Expense Tax Minorities / pref divs Equity accounted NPAT Net Profit pre Sig. Items Abn s / Ext s / Signif Reported Net Profit CASH FLOW ($m) Year-end June (AUD) FY10A FY11A FY12A FY13A FY14A FY15E FY16E FY17E EBITDA Interest & Tax Working Cap / Other Operating Cash Flow Maintenance Capex Free Cash Flow Dividends Paid Growth Capex Invest. / Disposals Other Inv. Flows Cash Flow Pre Financing Funded by Equity Funded by Debt Funded by Cash BALANCE SHEET SUMMARY ($m) Year-end June (AUD) FY10A FY11A FY12A FY13A FY14A FY15E FY16E FY17E Cash Current Receivables Current Inventories Net PPE Investments Intangibles / Capitalised Other Total Assets , ,077.3 Current Payables Total Debt Other Liabilities Total Liabilities Minorities / Convertibles Shareholder Equity Total Funds Employed Wilson HTM Equities Research 2

3 The result was good NPAT of $61.1m beat WHTMe by 11.2% mostly due to strong margin expansion in the UK as well as better-than-expected revenue contribution from UK acquisitions. All UK acquisitions either met or exceeded their target, and Fentons performed particularly strongly, leading to group revenues of $411m which was 4.1% above WHTMe. Additionally, UK EBITDA margins improved significantly, up 436 bps from pcp to 24.9% (WHTMe 21.8%) as case mix shifted towards higher margin multi track (complex injury) cases. Australia disappointed due to Workers Compensation law changes negatively affecting Queensland PI, as well as lower-than-expected margins. Revenues of $236m were 1.7% below WHTMe, while the EBITDA margin fell 133 bps from pcp to 24.3% (WHTMe 25.9%). Cash conversion (operating cash flow as a percentage of NPAT) was strong at 89.8%, although this includes one-off impacts relating to tax, as well as the bringing forward of cash collections from UK acquisitions. Two Australian acquisitions were announced. One firm specialises in PI in Victoria and the other is a Queensland general law practice, which will increase the scale of SGH s family law practice. We estimate the firms were acquired at c.4.5x EV/EBITDA. But what about the outlook? Outlook: Group revenue of $500m, including the two acquisitions just announced. The EBITDA margin is expected to be 23-24%, and cash flow from operations >70% of NPAT. Australia is expected to grow revenues to $270m, with PI growth of 5% and General Law growth of 10%. This includes contributions of $25.6m from new acquisitions in FY15. The UK is expected to grow revenue to $230m with 8% underlying growth. In our view, there are three key positives going forwards. First, acquisitive growth is a near-term catalyst. Management highlighted M&A as one of the company s core competencies and both Australia and the UK have operational teams to support M&A. The Australian PI market is estimated to be growing at 1.5-2% per annum. In order for the PI Practice to have the guided 5% growth, gaining additional market share is a necessity. The UK s PI regulatory framework is stabilising, which management sees as an opportunity to accelerate consolidation. Similarly, opportunities exist to scale up smaller General Law practices. They are unlikely to be on the scale of Pannone or Fentons, but increased leverage will be a positive for either Australian general law or the UK business. Notably, post the two newly announced acquisitions, the net debt to equity ratio will be in the mid-20s, whereas the balance sheet can accommodate 30-40%. Secondly, UK margin improvement highlights the potential of multi track cases. The FY14 EBITDA margin was 24.9%, compared with 19.5% as at 1H14 and 20.5% in FY13. We understand that around 24 months ago, c.15% of RJW s revenue was from multi track cases (complex injury cases, which are higher margin and higher value). But now around 35% of UK revenues stem from multi track cases. This was the result of a deliberate strategy, and despite the progress achieved over the past months management expects this metric to be lifted further. Thirdly, we expect Australian PI to normalise. While Australia PI s FY14 result was lacklustre, we highlight the fact that excluding Queensland the practice grew at 9%. Part of this was due to a bounce back in New South Wales following regulatory changes in In light of this, we expect Queensland to normalise following the weak FY14 performance. Wilson HTM Equities Research 3

4 Forecast We expect Australian PI to grow on average 5% per annum over the next few years. However, Queensland s issues may continue to affect FY15. This is partly driven by continued overhang from Workers Compensation law changes, as well as the migration of the TM brand to S&G. We expect the 5% per annum average growth rate to be achieved by a combination of organic and acquisitive growth, although acquisitions are likely to be small in size. Estimated PI market growth is only %, and hence SGH would need gain market share to deliver the targeted growth rate. As the UK continues to integrate acquisitions we expect some margin instability in the near term. However, over the middle to longer term, synergies are expected to deliver margin gains. Hence we expect the higher shared service costs will stabilise post full UK integration in March FY15. Management notes the cost of client acquisition is increasing overall, which will offset a part of the efficiency gains as the business further scales up. As a result, we do not expect margin improvement at the same pace as we have seen from SGH historically. The improvement will still come, albeit at a slower pace. In later years as the lower margin practices grow in size, the higher margin Australian PI business will be diluted. On this basis, we don t see SGH returning to the same margin obtained when Australian PI contributed the vast majority of EBITDA. As the UK acquisitions are integrated, we expect additional capex as various offices are relocated to a single Manchester location in FY15. FORECAST CHANGES Valuation NPAT BEFORE NPAT AFTER % CHANGE 9.9% 10.4% 10.3% EPS BEFORE EPS AFTER % CHANGE 7.9% 8.4% 8.2% DPS BEFORE DPS AFTER % CHANGE 0.0% 0.0% 0.0% SUMMARY PRICE TARGET DCF $ 5.65 PE $ 5.78 AVERAGE $ 5.71 Capital upside (% ) 9.1% Dividend Yield FF 1.5% 12 Month TSR 10.6% Source: WHTM Wilson HTM Equities Research 4

5 VALUATION METRICS FY15 FY16 FY17 PE EV/EBITDA EV/EBIT Dividend Yield (% ) fully franked WHTM Small Industrials PE (Discount)/Premium (0.03) EARNINGS SUMMARY share price $ Jun FY12A FY13A FY14E FY15E FY16E FY17E 12m FWD 24m FWD EBITDA growth 15.4% 25.9% 38.8% 22.4% 10.9% 8.5% EBIT growth 14.3% 25.3% 38.7% 22.8% 11.7% 8.4% NPAT growth 13.8% 25.5% 50.5% 17.6% 14.1% 11.4% EPS growth 9.1% 12.1% 29.5% 14.8% 13.0% 10.4% DPS growth 9.1% 10.0% 21.2% 12.5% 11.1% 20.0% Equity Value (period end) ,075.5 Net debt (period end) Enterprise Value (period end) ,176.5 Discounted cash flow valuation DCF input assumptions (%) Valuation ($M) 10-year government bond rate 5.00 PV of explicit cash flows Market risk premium 6.00 PV of horizon cash flows Levered beta 0.90 Perpetuity Value Cost of equity Entity value 1, Cost of debt, pre tax 8.00 Less corporate debt Current debt/value ratio 9.4 Total calculated value of ordinary equity 1, Corporate tax rate 30.4 Ord & potential shares on issue (M) WACC 9.96 Value/share ($) 5.65 Terminal Growth Rate 3.0% Current share price ($) 5.24 PE MULTIPLE Margin of Safety 8% FY15E FY16E FY17E 12m FWD 24m FWD EPS PE current Market PE Implied Prem/Disc EXPECTED RELATIVE PER multiple VALN/PRICE TARGET $ 5.12 $ 5.78 $ 5.72 $ 5.24 $ 5.90 Capital upside (% ) -2.3% 10.3% 9.3% 0.0% 12.6% Wilson HTM Equities Research 5

6 COMPARATIVE VALUATIONS FY15 FY16 FY15 FY16 FY15 FY16 FY15 FY16 15% 13% % 1.9% Tox Free Solutions Limited 15% 14% % 2.9% Super Retail Group Limited 11% 17% % 5.2% The Reject Shop Limited 21% 8% % 4.5% SAI Global Limited 18% 14% % 3.7% InvoCare Limited 10% 11% % 4.2% Domino's Pizza Enterprises Limited 18% 19% % 2.1% Credit Corp Group Limited 7% 10% % 4.8% Austbrokers Holdings Limited 7% 5% % 4.1% Average 14% 12% % 3.7% WHTM All Industrials 12% 12% % 4.4% WHTM Small Industrials 14% 15% % 3.7% Source: WHTM, Thomson Acquisitions EPS GROWTH EV/EBITDA SGH announced the proposed acquisition of two Australian firms. We estimate the EV/EBITDA multiple of both to be c.4.5x, in line with SGH s historical average. Nowicki Carbone a Victorian PI firm with annualised revenue of $26.0m (pro rata FY15 revenue $17.0m). Schultz Toomey O Brien a Queensland General Practice with annualised revenue of $13.0m (pro rata FY15 revenue $8.6m). The Schultz practice mix is c.40% PI and 45% family law, with the remainder in general practice. Notably, the family law practice will increase SGH s current family law practice by 40-50% at the revenue line, but Schultz s margin is higher. This will have a positive impact for FY15 and annualise in FY16. ACQUISITIONS Nowicki Schultz Toomey $m Carbone O'Brien Total Annualised Revenue WHTMe EBITDA Margin 39% 32.00% 36.67% WHTMe EBITDA Consideration: Cash at completion Upfront Equity FY16 deferred/conditional cash FY17 deferred/conditional cash Total consideration EV / EBITDA Multiple P/E DIV YIELD Source: WHTM and Company Presentation Both transactions are expected to be completed by November 2014 and are subject to final due diligence and/or execution. At this time we have factored in both acquisitions into our forecasts. Wilson HTM Equities Research 6

7 Result detail PROFIT & LOSS FULL YEAR RESULT FY14 FY13 % Chg. WHTMe % Diff. Consensus % Diff. Sales % % % EBITDA % % % EBITDA Margin 24.5% 24.3% 0.2% 24.2% 0.3% 24.3% 0.2% EBIT % % % EBIT Margin 22.8% 22.7% 0.1% 22.7% 0.1% 22.7% 0.1% EBT % % % NPAT (Normalised) % % % NPAT Margin 15.3% 14.1% 1.3% 14.3% 1.0% 14.7% 0.6% NPAT Reported % % % EPS % % % DPS % % % Payout 26.0% 27.7% -1.8% 28.9% -2.9% 27.3% -1.3% Net Debt % % % Net Debt/Equity 25.1% 9.2% 16.0% 23.1% 2.1% Working Capital Required % % % of Sales 128.5% 117.2% 11.2% 118.4% 10.1% Operating Cash Flow % % Capex (5.2) (2.3) 124.0% (3.1) 68.7% (4.7) 10.5% NPAT was $61.1m, beating WHTMe by 11.2% and mostly driven by strong margin expansion in the UK as well as better-than-expected revenue contribution from UK acquisitions. Revenue of $411.1m was 4.1% above WHTMe. All UK acquisitions either met or exceeded their target, and Fentons performed particularly strongly. Conversely, Australia revenues were softer than expected mostly due to Queensland PI, where changes to Workers Compensation laws in 2013 have slowed file resolution and affected new case enquiries. EBITDA margin (normalised) of 24.5% was 30 bps higher than WHTMe and an improvement of 20 bps from pcp. UK EBITDA margins performed strongly as case mix shifted towards higher margin complex PI cases. However, this was diluted by a decrease in Australian EBITDA margin, due to a weak Australian PI practice. This excludes a one-off WIP adjustment following the Fentons acquisitions as well as a $6.1m lease provision for UK office relocation (to Manchester) and $4.1m for acquisition costs. The full-year dividend is 8 cps fully franked, in line with WHTMe. This implies a mid-20s payout ratio in line with management expectations. Only 40-50% of future dividends will receive franking credits due to the tax impact of acquisitions and the shift of earnings to the UK, Wilson HTM Equities Research 7

8 DIVISIONAL RESULTS FULL YEAR RESULT FY14 FY13 % Chg. WHTMe % Diff. SALES Slater & Gordon % % Slater & Gordon UK % % EBITDA Slater & Gordon % % Slater & Gordon UK % % EBITDA MARGINS Slater & Gordon 24.3% 25.6% -133bps 25.9% -159bps Slater & Gordon UK 24.9% 20.5% 436bps 21.8% 304bps EBIT Slater & Gordon % % Slater & Gordon UK % % EBIT MARGINS Slater & Gordon 22.8% 24.1% -134bps 24.5% -167bps Slater & Gordon UK 22.8% 18.2% 467bps 20.1% 278bps AUSTRALIA Australian revenue growth was relatively subdued, increasing 3.9% from pcp to $236m, but falling below WHTMe of $240m. This was mainly due to underperformance in Queensland PI, which was affected by changes to Workers Compensation laws in The effect of these changes has slowed down the resolution speed of cases, and affected the number and value of new claims. In addition, management noted some challenges in maintaining the Trilby Misso and S&G double brands this year and as a result has decided to move to a single brand business in Queensland. TM will be migrated to S&G in two months. Excluding the Queensland business, the Australian PI business grew 9%, as the Victorian and Tasmanian businesses performed well. Management has reiterated average PI growth of 5% based on taking market share, given the market is estimated to be growing at only 1.5-2%. The weaker contribution from Australian General Law was due to a known lull in revenues from the class actions group. The litigation pipeline was being rebuilt in FY14 as a number of class actions were resolved in FY13. Management notes this is not expected to cause similar disruptions in future. PI revenues were 81% of revenue split while General Law practices made up 19% or $45m of FY14 Australia revenue. EBITDA margin of 24.3% fell 133 bps from pcp, and was below WHTMe of 25.9% mainly due to the soft PI revenues. PI EBITDA margin remained in the target range of 30-32%, and notably Australian General Law is now making a positive contribution at the EBITDA line. Wilson HTM Equities Research 8

9 We note that result commentary points to potential further acquisitions in both PI and General Law practices in addition to the newly announced acquisitions. The General Law market is particularly attractive as management estimates the market is >2x the size of the PI market, growing at a faster rate and with limited competitors of similar scale. UK UK revenue grew strongly, and was 13% above WHTMe. According to management, all acquisitions met or exceeded their targets, Fentons contributed particularly strongly. Underlying UK revenue growth is estimated to be 8%, net of acquisition contributions. Management notes that most competitors are stable except Irwin Mitchell which increased marketing and lateral hires strongly in 2H14. The FY14 revenue split was 77% PI, and 23% General Law. EBITDA margin was 24.9%, significantly stronger than WHTMe of 21.8%. Our forecast was based on a 1H14 result of 19.5%. Management attributes this to a change in mix towards complex personal injury cases (called multi track) from simpler and lower margin fast track cases. While a shift towards these higher margin/higher value cases was expected, we had not anticipated this degree of progress in the first year post acquisition especially given the known increase in marketing expense as the brand is being built up in the UK. However, we note the FY14 margins derived from PI were at the top end of the target range, while the smaller General Law practice remains well below the 12-15% EBITDA margin target. In the next few years we expect some margin instability as UK integrates its acquisitions, while over the middle to longer term, synergies will contribute to margin gain. Wilson HTM Equities Research 9

10 Integration of acquisitions remains on track and management expects the completion of property relocation as well as all brands to transition to S&G (Fentons by October 2014, Pannone by March 2015). Additionally, the implementation of SGH s Case and Practice Management System will be complete by March We expect organic and acquisitive growth in both practices in future. Management states that UK s PI regulatory environment is stabilising which is providing an opportunity to accelerate consolidation. Additionally, in General Law there are good opportunities to scale up smaller practices. BALANCE SHEET AND CASH FLOWS SOLVENCY MEASURES Net debt Total Debt Net Debt/Equity 3.5% 22.4% 42.8% 9.2% 23.9% Net Debt /Debt plus Equity 3.4% 18.3% 30.0% 8.4% 19.3% Net Debt/EBITDA Net Debt/CF EBITDA adj Interest cover Quick ratio Net debt at FY14 end was $101.1m, with a gearing ratio of 24%. In our view, the balance sheet has room for further acquisitions which was alluded to throughout the results commentary. Management reiterated that a 30-40% net debt to equity ratio is comfortable. CASH RECONCILIATION Operating Cashflow Add: Cash Interest (Net) (2.60) (3.49) (5.02) (5.88) (4.94) Add: Cash Tax Paid 1.64 (2.54) 0.16 (0.54) (8.01) Adjusted Cashflow EBITDA Conversion (Ad Cashflow / EBITDA) 81.6% 52.6% 35.3% 54.2% 67.3% Cash flow conversion, which SGH measures as operating cash flow as a percentage of NPAT, was 89.8% in FY14. This is significantly stronger than WHTMe and historical average of c.70%, but was driven by one-off impacts relating to tax, as well as the bringing forward of cash collections from UK acquisitions. We expect this to normalise and cash conversion guidance is >70% in FY15. Working capital movement Days WIP Days Receivables Days Disbursements Days Trade Creditors Working Capital Required Working Capital as a % of sales 118.6% 122.8% 128.2% 112.0% 124.2% Management notes that the increase in WIP days reflects a greater mix in Australia of higher value cases (which take longer to resolve), rather than a slowdown in case velocity. Wilson HTM Equities Research 10

11 Low Return High 13 August 2014 RETURN RE-INVESTMENT MATRIX RISK MEASURES Cash Generator Challenged Champion Potential Low High Re-investment Share price risk: Limited external drivers of the share price. Risk: Practice areas diversify revenue but RJW is international which is riskier than domestic. Project litigation swings. Cash flow matching earnings remains an issue. Share Price Risk Business Risk Low Med High Spec Innovative structure and system, no one market leader and consumer brand. High barriers to entry. Re-investment: New ABS structure in UK and RJW acquisition with Claims Direct. Significant potential. Wheel and spoke structure for call centres locally in Australia. BUSINESS DESCRIPTION (SGH) is the largest consumer law business in the country, and was the first law firm worldwide to list on a stock exchange. Its areas of specialisation are personal injury, family law, conveyancing and property law, as well as commercial disputes, employment law and litigation. In Australia, the business includes Slater & Gordon and Trilby Misso, which has around 50 offices nationally employing more than 1,000 staff. Recently, SGH acquired UK-based law firm Russell Jones & Walker including the personal injury brand Claims Direct, after the introduction of Alternative Business Structures allowed law firms to be owned by non-lawyers. was founded in 1935 and is based in Melbourne, Australia. INVESTMENT THESIS SGH is the largest consumer law business in the country with more than 800 staff and 41 main offices nationally. Post the acquisition of Trilby Misso and Keddies, SGH enjoys about 20-25% market share in personal injury and less than 1% in non-pi areas. Professionalising a cottage industry or the McDonald s of consumer law, either way SGH provides a unique exposure to the legal market. Its core markets are not correlated with the broader economy and earnings should grow organically in the order of 10%+ per annum. Unlike other professional services firms, SGH revenues are driven by brand advertising rather than partner networking. Its marketing effort is targeted at the grass-roots level, connecting directly with the local community. As such, the underlying principals of a retailer and brand owner are relevant. The brand is advertised on a broad range of media and drives the foot traffic into the call centre. Advanced practice management system (PMS) and workflow enable SGH to handle increasing amount of client enquiries and to drive efficiency gains. The recent RJW acquisition provides entry into a larger market undergoing substantial regulatory change. We believe SGH s competitive advantage can capitalise on this industry change and provide organic growth for many years to come. REVENUE DRIVERS Number of incoming enquiries and conversion rates Amount of work in progress (some acquired) and time to complete Success of marketing campaigns and brand awareness Non-PI product launches Office roll-out and staff headcount Success in the UK market following RJW acquisition MARGIN DRIVERS Integration of acquisitions Practice management system enhancements Maturation of newer businesses should drive margin Staff utilisation rate and office capacity Mix between PI (higher margin) and non-pi (lower), and between Victorian (higher) and non-victorian (lower) businesses UK business following RJW acquisition KEY ISSUES/CATALYSTS Organic growth in the domestic businesses Keddies operational performance Execution and integration risk for RJW Penetration into the NSW market UK margin expansion post practice management system rollout RISK TO VIEW Regulatory changes affecting fees and conducts Aggressive marketing campaign by competitors Problems in rolling out PMS Negative outcome of project litigation cases affecting brand name Excessive issuance of VCR diluting existing shareholders BALANCE SHEET Outstanding VCR shares: 5.11M Normalised working capital: 117% of revenue BOARD John Skippen, Chair Andrew Grech, Managing Director Ken Fowlie, Executive Director Ian Court, NED Erica Lane, NED Rhonda O Donnell, NED MANAGEMENT Andrew Grech, Managing Director Wayne Brown, CFO and Company Secretary Neil Kinsella, CEO UK Cath Evans, COO UK Ken Fowlie, COO Australia CONTACT DETAILS Address: 485 La Trobe St, Melbourne VIC 3000 Australia Phone: Website: Wilson HTM Equities Research 11

12 Head of Research Head of Institutional Sales Shane Storey (07) Richard Moulder (02) Industrials Sydney James Ferrier (03) Jonathan Scales (02) Stewart Oldfield (03) Duncan Gamble (02) George Gabriel (03) Michael Pegum (02) Daniel Wan (02) Anthony Wilson (02) Andrew Dalziel (07) Peter Tebbutt (02) Healthcare and Biotechnology Melbourne Shane Storey (07) David Permezel (03) Joseph Michael (02) Adam Dellaway (03) Resources Phillip Chippindale (02) Wealth Management Research James Redfern (02) Peter McManus (02) Liam Schofield (02) John Lockton (02) Quantitative Nathan Szeitli (03) National Offices Return Reinvestment Matrix and Risk Measures Definitions at Recommendation Structure and Other Definitions Definitions at Disclaimer Brisbane Ph: (07) Sydney Ph: (02) Melbourne Ph: (03) Gold Coast Ph: (07) Dalby Ph: (07) Hervey Bay Ph: (07) Our website: Whilst Wilson HTM Ltd believes the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. To the extent permitted by law Wilson HTM Ltd disclaims all liability to any person relying on the information contained in this communication in respect of any loss or damage (including consequential loss or damage) however caused, which may be suffered or arise directly or indirectly in respect of such information. Any projections contained in this communication are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of Wilson HTM Ltd and therefore may not be realised in the future. The advice contained in this document is general advice. It has been prepared without taking account of any person s objectives, financial situation or needs and because of that, any person should, before acting on the advice, consider the appropriateness of the advice, having regard to the client s objectives, financial situation and needs. Those acting upon such information without first consulting one of Wilson HTM Ltd investment advisors do so entirely at their own risk. This report does not constitute an offer or invitation to purchase any securities and should not be relied upon in connection with any contract or commitment whatsoever. If the advice relates to the acquisition, or possible acquisition, of a particular financial product the client should obtain a Product Disclosure Statement relating to the product and consider the Statement before making any decision about whether to acquire the product. This communication is not to be disclosed in whole or part or used by any other party without Wilson HTM Ltd s prior written consent. Disclosure of Interest. The Directors of Wilson HTM Ltd advise that at the date of this report they and their associates have relevant interests in Slater & Gordon Ltd. They also advise that Wilson HTM Ltd and Wilson HTM Corporate Finance Ltd A.B.N and their associates have received and may receive commissions or fees from Slater & Gordon Ltd in relation to advice or dealings in securities. Some or all of Wilson HTM Ltd authorised representatives may be remunerated wholly or partly by way of commission. In producing research reports, members of Wilson HTM Ltd Research may attend site visits and other meetings hosted by the issuers the subject of its research reports. In some instances the costs of such site visits or meetings may be met in part or in whole by the issuers concerned if Wilson HTM Ltd considers it is appropriate and reasonable in the specific circumstances relating to the site visit or meeting. Please see disclosures at Disclosures applicable to companies included in this report can be found in the latest relevant published research. Wilson HTM Equities Research 12