SHJ is based in Queensland but has grown a national footprint through a series of acquisitions.
Along with Slater and Gordon (SGH), SHJ is taking advantage of the highly fragmented nature of the legal industry.
SHJ recently purchased Emanate Legal, a Queensland-based legal firm specialising in land owner access rights, and Stephen Brown Personal Injury Lawyers, a WA-based plaintiff litigation firm.
The acquisitions are both expected to earnings per share accretive in FY15.
SHJ’s personal injury (PI) division, which includes workers’ compensation, motor vehicle accidents, medical negligence and public liability, comprises the bulk of group revenue,
Revenue at rival SGH shot up 40% in FY14 thanks to robust growth in its personal injury business. SGH forecast 19% additional revenue growth in FY15.
Both companies operate in a market (PI) with a healthy growth outlook. SHJ flagged further acquisitions to boost its own growth.
Given the PI market’s potential, we view the risk of SHJ overpaying for acquisitions as low and the resulting payoff to be high.
We see value in SHJ at current levels, noting the stock’s forward P/E of 15.1x represents a ~9% discount to rival SGH.
We don’t think the market is appropriately factoring the upside potential from Emanate Legal.
The acquisition provides SHJ an increased presence in emerging practice litigation, which includes product liability, professional negligence, class actions, landowners’ rights and human right.
Emerging practice revenue at SHJ surged 48% in FY14 and further strong growth is expected post-acquisition.
Emerging practice accounted for 15% of FY14 revenue, up from 12% in FY13 and likely to be a more important contributor to group revenue in coming years.
SHJ guided for an FY15 EBITDA of $41-$45 million, representing a 26% jump on FY14’s $34.2 million.
We’d be comfortable with a P/E of 15x given this growth potential, which we think is easily achievable when also considering the group’s tight cost control – EBIT margin expanded 12% in FY14.