The Australian law firm Shine Corporate Limited (ASX:SHJ) released a downbeat market update as it halved its FY16 earnings guidance from $54 million to $26 million.
Work in Progress Provision of $17.5 Million
The company made a few announcements in the previous week, where it stated that it was engaged in the process of reviewing its Work in Progress (WIP) recovery rates and expects to increase provisions which might have a significant impact on its previously announced FY16 EBITDA guidance.
Upon completion of the detailed analysis around the recovery rates and provision methodology, Shine concluded that it is required to increase the provision by $17.5 million. Shine increased the provision as it expects some to lose some of its current cases within its Personal Injury division.
Gloomy Business Operations
The company’s core business suffered during the first half of FY16, mainly due to lower income from underperformance by some fee earners and sub-optimal fee-earner to file ratios. It also faced greater than expected write-offs due to factors such as regulatory reforms and high market competition in Queensland.
Shine aims to introduce tighter performance management and recruitment policies and expects to improve its future bench strength and profitability notwithstanding short term revenue reduction. The company however expects to recover its business operations in the second half of the fiscal year and execute strategic initiatives to deliver greater efficiencies.
While the underlying operational performance of its acquired businesses was solid, Shine expects to perform fewer acquisitions in 1H16.
Focus on Business Transformation
Shine stated that the company aims to improve recoverability and optimise its business model. It will focus on cultural change in the first half of FY16 by strengthening its accountability model, refining its WIP management processes and improving its case selection processes.
The company also aims to change its recruitment policies in order to improve the bench strength of it legal and management team. It also targets to improvise its marketing strategy and IT platform.
FY16 Guidance Update
Shine provided an original EBITDA guidance in the range of $52 to $56 million in August 2015. However, the company now expects to earn $10.5 million lower income from its business operations and has also increased its provisions by $17.5 million. Shine has now downgraded its guidance by 50% as it expects its EBITDA in the range of $24 million to $28 million at the end of the fiscal year.
Shine’s Managing Director, Simon Morrison, commented on the update: “The increase in provisions will not impact operating cash flow in 1H FY 2016 and protects the balance sheet against the risk of future write-downs.”
The disappointing market update has sent SHJ down 70% upon opening, as it was last traded at $0.65 (as at 10:25 AM AEDT).
Author: Simon Herrmann
Jan 29, 2016
Simon is a financial analyst at independent research firm Wise-owl specialised in small-mid cap growth opportunities and ethical investment opportunities. Simon's aim is to disrupt the cliché approach to investment decision making as he believes that socially and environmentally responsible behaviour is a necessity to long-term wealth creation. Simon has a deep fundamental understanding of the global financial landscape and has compiled 300+ research reports, valuations and corporate appraisals. Simon is commonly featured in major media outlets and his research is published weekly in The Australian.