Treasure Chest | Mar 27 2019
FNArena's Treasure Chest reports on money making ideas from stockbrokers and other experts. Acquisitions are key to the growth plans of Shine Corporate, providing more diverse earnings for the lawyer group. Moelis Australia initiates coverage of the stock.
-Share price remains depressed despite improved operating performance
-Class actions an increasing component of the business
-Johnson & Johnson class action potentially a near-term catalyst
By Eva Brocklehurst
Shine Corporate ((SHJ)) is expanding its legal practice areas to obtain exposure to fast-growing segments such as class actions and family law, which also provide diversity in earnings. Acquisitions form a key part of the company's growth plans.
The stock has sparked interest from Moelis Australia, which initiates coverage with a Buy rating and $0.89 target. The broker notes the company's operating performance has improved since FY16, despite the share price remaining depressed, as management has been intent on stabilising core business.
Class actions, in particular, have increased strongly as a result of royal commissions into such areas as institutional abuse, financial services and aged care. The growth in class actions has been helped by increased adoption of third-party litigation funding.
The legal services industry is fragmented and Moelis believes there will be ample opportunity for Shine Corporate to make accretive acquisitions. The three largest operators are Slater & Gordon ((SGH)) and Maurice Blackburn with Shine Corporate coming in third.
The company has a defensive business in personal injury legals, which has limited exposure to the domestic economy and is characterised by stable growth and lower volatility. This appeals to the broker in the current market environment.
Management has stabilised its core business and delivered two consecutive years of earnings growth, enhancing fee productivity and recoveries from work-in-progress. The broker considers there is further opportunity for improvement. The stock trades at a 6.0x ratio to the broker's FY19 estimates for earnings per share. Moelis believes the Johnson & Johnson class action could be a key short-term catalyst for the stock.
Morgans suspects this particular class action, regarding mesh product liability, will keep investors on the sidelines until it is resolved. The company has not disclosed the work-in-progress build associated with this matter and mediation continues.
Morgans has an Add rating and $1.14 target for Shine and also expects the company will continue to build out a national family law business. Since the first half result, Shine has acquired a majority interest in Carr & Co, a Perth-based family law practice. During the first half the company acquired ACA Lawyers which operates in the class actions segment in NSW. This business is focused on commercial litigation and dispute resolution.
Shine provides legal services in Australasia with a focus on damages-based personal injury litigation, comprising 68% of FY18 revenue. The company has over 50 offices and was founded in 1976 in Toowoomba, Queensland. The stock was listed in 2013 at an IPO of $1.00 a share.
Key class actions currently being undertaken include Johnson & Johnson (mesh product liability), Department of Defence (land contamination), WorleyParsons ((WOR)) (shareholder misconduct) and Westpac Banking Corp ((WBC)) (overcharging on life insurance).
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