Listed law firm Shine Corporate (SHJ) has been a good performer in recent months, and we think is approaching a potential positive catalyst event. Firstly, to briefly cover the company’s background for those unfamiliar, it operates in two segments:
- Personal Injury – deals with injury related cases around medical negligence, workers compensation, motor vehicle accidents etc.
- Emerging Practices – deals with family law, superannuation claims, landowners rights, class actions etc.
A volatile history
Despite having a long operating history (founded in 1976), the company has had a volatile life since listing in 2013. The share price reached a high at over $3/s in 2015 before reaching a low at under 50c/s in 2017, due to a range of issues. These included the well-publicised near-death experience of listed competitor Slater & Gordon which impacted the sentiment towards the industry, as well as several own goals around optimistic assumptions on case completion and recovery rates, as well as relatively new management and the subsequent poor operational performance of the business.
Subsequently, a number of positive developments have occurred. Importantly, co-founder of the firm Simon Morrison returned to the helm as MD, stabilising the business. Operational improvements have followed, including tighter WIP management (Work In Progress – a feature of running legal cases which can last for several months or years), improved recovery rates, lower staff turnover, and more focused marketing campaigns which have led to better quality leads coming into the business. As a consequence, the financial metrics have started to improve, while the share price has doubled to around $1/s. Essentially we see that the company is back on a growth footing, and remains cheap at a 6.5x FY19 PE.
Is there a significant catalyst coming?
One of the fastest growing segments for SHJ in recent years has been their class action practice. There is one case in particular that is significant in size, which in our view has a good likelihood of delivering a favourable outcome to SHJ in the coming months. The case is the ‘Prolapse Mesh’ class action against Johnson & Johnson which has now run for several years. The law firm is essentially prosecuting the case on behalf of several hundred women against the global giant for faulty vaginal mesh implants that have had devastating impacts on thousands of women across Australia.
While timing is difficult to know, we believe an outcome could be reached sometime this calendar year, either in the form of a settlement or a judgement.
Our positive predisposition to this case is based on several similar cases globally against the manufacturers of defective mesh implants which have started to settle or reach a verdict in recent months. These have largely resulted in punitive damages against the manufacturers, to the tune of tens of millions of dollars for each case. The basis for the judgements has typically been that these companies kept selling defective products despite knowing that women were being harmed. Indeed in Australia recently, a Senate committee heard of the devastating physical and mental scars left by mesh implants, with Senator Derryn Hinch describing it as:
‘the biggest medical scandal for Australian women since thalidomide in the 1950s and 1960s, when kids were born without arms and legs’.
Also, a recent 60 Minutes expose in the US highlighted a similar damning case against mesh manufacturer Boston Scientific.
The above developments suggest that on balance, SHJ’s position in the class action is strong. They have committed a substantial amount of WIP to this class action over the years, and a favourable outcome could potentially deliver a handsome return. SHJ’s 1H18 result showed a net debt position of $43m, which while entirely comfortable, could be extinguished in the event of a favourable outcome. We believed a transformed balance sheet would bode extremely well for the company’s growth aspirations, as it would support initiatives to grow market share, particularly while a large competitor in Slater & Gordon remains in damage control.
Hi Naheed, Thanks for your article. I noticed that you did not disclose whether or not you or Flinders Investment Partners hold a position in Shine, would you be able to disclose? I also noticed your quote; "SHJ’s 1H18 result showed a net debt position of $43m, which while entirely comfortable, could be extinguished in the event of a favourable outcome." Do you have any figures or analysis available to share that would support a potential cash windfall of ~$43 million? Much appreciated.
Hi AD. Flinders does hold a position in SHJ in our Emerging Companies Fund. Given the size of the class action and the several years that it has been running for, I would estimate about $20-30m is tied up in WIP and disbursements (all fully funded by SHJ, as opposed to a disbursement funder or litigation funder). So in a positive scenario, they would recoup this amount fully. Additionally, SHJ would enjoy a cut of the total proceeds of any damages awarded, whatever that may be, as payment for their services. As I mentioned, a number of similar cases globally have started to settle in the tens of millions of dollars.