Slater and Gordon shares drop another 36pc as bloodbath continues

Shares in Slater & Gordon close 26pc weaker after analysts rounded on the beleaguered law firm.

Shares in beleaguered law firm Slater & Gordon crashed again today, after diving 51 per cent yesterday, as a “perfect storm” destroys the company’s value.

Slater & Gordon, the first listed law firm, has seen its market value plunge from more than $1 billion in April to around $300 million today as concerns about dodgy accounting practices at the group’s recent $1.2 billion UK acquisition and the impact of a British government crackdown on “whiplash fraud” see investors rush for the exit.

Shares in the group fell as much as 36 per cent to 59.5c in early trade, after diving 51 per cent yesterday. The stock was worth $7.85 in April this year. By the official market close shares were trading 26 per cent lower at 69c.

On Wednesday, UK Chancellor George Obsorne said the government would embark on a crackdown on personal injury claims from road traffic accidents, which he claimed cost UK insurers around £2 billion pounds a year in rorting.

Slater & Gordon’s professional services division, which it took over from Quindell earlier this year and renamed Slater Gordon Services, has already been hit by an accounting scandal but the flagged changes to road accident compensation are to expected to wipe earnings from the company from 2017.

Deutsche Bank analyst Dominic Rose said Slater & Gordon was facing a “perfect storm”, and although the firm had reaffirmed its 2016 earnings target yesterday, the regulatory change presented “significant risk and uncertainty” in fiscal 2017 and beyond.

“The UK Government overnight announced proposals which, if implemented, will potentially adversely impact SGH’s Fast Track road traffic accidents (RTA) volumes and earnings from FY17,” Mr Rose said, predicting a “bear case” scenario would wipe out 27 per cent of Slater & Gordon earnings before interest, tax, depreciation, amortisation and write-offs.

Road traffic accidents make up around 95 per cent of Slater Gordon Services legal services cases and around 70 per cent of the case volumes relate to claims with a value of less than £5000. The government is aiming to increase the limit of the Small claims Court from £1,000 to £5,000.

Morgans analyst Alexandra Clarke said the law firm had been “blindsided” by the regulatory change, and left the company’s value at around half of its net debt of more than $600 million.

Macquarie researchers were also concerned about the level of company debt, saying that with over $650m net debt, Slater & Gordon’s balance sheet position “in our view does not afford much flexibility to withstand a significant earnings hit”.

Ms Clarke said: “This announcement, while highly preliminary in nature, creates further uncertainty for SGH‟s earnings outlook.” But the analyst noted that Slater & Gordon “has proven over the years its ability to adapt and benefit from legislative change”.

“Given an implementation of this proposal could well impact longer term earnings and with the ASIC review also overhanging the stock, we downgrade our rating to Hold,” Ms Clarke said.

UBS analyst Martin Byers said the law firm was likely to underperform and faces a number of issues, “the most striking of which, in our opinion, is an ASIC investigation into its audit process”, which has identified accounting errors with its historical financial statements.

UBS slashed 67 per cent off its price target from $2.80 to 90c, which is below yesterday’s closing price of 94c.

The fresh dive in the stock’s value also followed the law firm’s annual general meeting earlier this week, where managing director Andrew Grech said the company was on track to meet its earnings guidance despite seeing negative cash flow in the first half of the year.

Analysts promptly poured cold water over the claims, believing Slater & Gordon would need to see six years worth of cash flow in six months to achieve the target.

For rolling coverage of Slater and Gordon’s share price tumble and all the day’s market moves, follow BusinessNow.