Slater & Gordon hit by UK road law proposal

Slater & Gordon’s market value has been slashed after Britain proposed changes to road accident compensation.

Andrew Grech, managing director of Slater & Gordon. Picture: Britta Campion

Slater & Gordon has had its market value slashed in half after the British government proposed a significant tightening of road accident compensation claims, a major source of business for the law firm.

The firm’s shares slumped more than 51 per cent yesterday despite the company telling the market it expected no earnings changes for the current financial year, and was yet to know what the change’s impact would be in the long term.

Slater & Gordon, which had a market capitalisation of more than $1 billion last week, is currently worth $311 million after a warning to shareholders about cashflow last Friday triggered a series of savage selldowns in recent days.

Analysts are already warning about the impact on the company’s sizeable debt level, which stands at more than $600m.

The restrictions, proposed by British Chancellor ­George ­Osborne and made in a semi-­annual economic statement, would remove the right for ­people injured in motor accidents to obtain compensation for pain and suffering in minor soft-tissue injury claims, and increase the threshold for cases heard at the Small Claims Court from £1000 ($2090) to £5000.

Slater & Gordon’s British business is already highly exposed to high-volume, low-margin cases, an exposure only increased by its acquisition earlier this year of Quindell’s professional services division, now rebranded Slater Gordon Solutions.

In a statement, the company said that while the announcement was unexpected, it “believes that the scale and diversity of the Slater Gordon Solutions business in the UK positions it well to deal with the potential impact of any future legislative change”.

The company declined to comment further.

Macquarie analysts estimate “fast track” cases make up 80 per cent of the law firm’s British case exposure, telling clients that while details were limited, the change could be the most significant and material since sweeping changes made in 2012.

Mr Osborne said the proposal would remove £1bn from the cost of providing motor insurance.

“We expect the industry to pass on this saving, so motorists see an average saving of £40-£50 per year off their insurance bills,” he said.

The British government will not implement the changes immediately, instead asking the Ministry of Justice to consult stakeholders, a process the company said it would engage in.

Slater & Gordon’s share price was already under pressure, after the company reaffirmed its current year earnings guidance of $205m but telling investors at its annual general meeting last Friday it was “now a likelihood” the law firm would have a negative cashflow of up to $40m.

“The AGM update showed a far greater second-half skew to cashflows than we had been expecting and suggested the turnaround was taking longer to achieve,” Macquarie analysts said yesterday.

Questions about the company’s debt covenants have already been aired, with CLSA’s Oscar Oberg forecasting the company’s net debt to earnings ratio could blow out to about 2.8 by December.

Mr Oberg told clients this week the company would have to achieve a gross cashflow of about $192m in the second half — the sum of the past six years worth of gross operating cashflow — just to achieve the $205m guidance.

Slater & Gordon’s share price ended the day at 94c, down 99.5c, a 70 per cent decline in the week since Friday’s meeting, and 86 per cent lower than in late June, when reports emerged that the Australian Securities & Investments Commission had begun asking questions about the company’s financial accounting.

In March, Slater & Gordon’s shares peaked at $7.85 each.

Managing director Andrew Grech has repeatedly defended the company’s accounts, which were restated this year after problems were found as the ASIC inquiry progressed.

The law firm has been the target of short sellers since its $1.23bn deal with Quindell, with hedge funds claiming organic revenue growth was lacing and work-in-progress was not being converted into cashflow, claims Mr Grech has previously said were “demonstrably not true”.

The latest short-selling figures, for the morning before last week’s AGM, show 16 per cent of the company’s shares were reported in a short position, among the highest of all listed firms.