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Irwin Mitchell: we’ll float and take on the mid-tier

Looking at Slater & Gordon is instructive: their track record since flotation mid-2007 has been pretty good. The IPO was at A$1, the shares are now circa A$2.50, despite significant dilution from subsequent issues. They are growing pretty fast by acquisition (consolidation of PI firms) - the last 6 month report if annualised indicates fee income about A$170m (A$63m in 2007) and market capitalisation at A$367m, ie a multiple of 2.2x fees, which compares very favourably with the (extremely loose) rule of thumb we have used traditionally, ie 1x fees. The market cap indicates a P/E ratio of 16x, which is respectable by any standards, given market conditions over recent years. Essentially, the market is saying it likes the model and backs the management. The availability of valued equity is a powerful tool, used in conjunction with generous bank borrowing facilities, for effecting acquisitions and incentivising key personnel. The net effect is that Slater and Gordon are now a significantly greater force in their market than they were 4 years ago.

28-Apr-2011

3:24 pm