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Shine Lawyers, the only Australian law firm endorsed by Hollywood's litigation poster girl, Erin Brockovich, is reaping millions in revenue - so why has only a few thousand dollars in cash come through the door so far this year?
The company, which has what it describes as a "formal strategic partnership" with Brockovich, wants to list on the ASX in a partial float that should net founders Simon Morrison and Stephen Roche a combined $30 million.
The firm was founded in 1976 as a single practice in Toowoomba, Queensland, but in recent years it has expanded aggressively and now claims to be the third-biggest plaintiff litigation outfit in Australia. It even has its own lawyer boot camp, Tiddalac, in the Lockyer Valley.
No doubt aided by TV ads featuring Brockovich, revenue went from $59 million in 2010 to $85.5 million in 2012, according to a prospectus released last month.
In the first half of 2013, it has booked $48.8 million and predicts revenue will exceed $100 million for the entire year. Sounds great. And yet operating cash flow for the first half of 2013 was just $4000.
The difference appears to be that while Shine is recognising revenue using a formula based on the billable hours worked by its lawyers, the cash figure represents bills actually paid.
Shine also bought a couple of new practices for $7 million while capital expenditure soaked up an additional $2.6 million. After all the figures are totted up, cash on hand slumped by $8.7 million.
The company reckons payments are seasonal and everything will be hunky dory by the end of the financial year, with operating cash flow to hit $8 million and net cash flow to be more than $10.5 million - in the correct, inwards, direction.
The float itself is supposed to raise $45 million at $1 a share, in return for which punters will end up with 29 per cent of the company.
However, only $15 million will flow to the company (before the costs of underwriter RBS Morgans and co-manager Bell Potter, of course). The rest flows to Morrison and Roche in return for 30 million of their shares, reducing their stake to 65 per cent.
Sweet service
Investors will also be putting their faith in executive director Roche, who has first-hand experience of the difference between writing a bill and getting it paid.
In 2003, Roche's ticket to practise as a lawyer was suspended for a year after the Queensland Solicitors Complaints Tribunal found him guilty of gross overcharging.
Roche had charged a client who got a $2 million settlement more than $570,000 for services including sending a box of chocolates to the secretary of a doctor who had provided a medical report. That exercise cost the client $156.
Big hitters
China's answer to Davos, the Boao Forum, kicks off on Friday and there'll be plenty of Australian business leaders there who have made the trek to meet and greet their counterparts at our biggest trading partner.
Those embarking on what looks to be an exhausting three days of conferences, roundtables, press conferences, lunches and dinners include a bevy of chairmen: Fortescue's Andrew Forrest, Transfield Services' Tony Shepherd, Macquarie Group's Kevin McCann, Linfox's Lindsay Fox, Mirvac's James MacKenzie and two-for-one attendee Michael Chaney, who chairs both Woodside and NAB.
Chief executives Gail Kelly (Westpac), Nicholas Moore (Macquarie), Alan Joyce (Qantas) and Mike Smith (ANZ) are also among nine pages of VIP attendees. They'll be rubbing shoulders with Aussies including PM Julia Gillard, former PM
Bob Hawke, former treasurer Peter Costello and a bewildering array of other international guests such as Bill Gates, George Soros and the Sultan of Brunei, Hassanal Bolkiah.
Got a tip?
bbutler@fairfaxmedia.com.au
Frequently Asked Questions about this Article…
Shine Lawyers is an Australian plaintiff litigation firm that has expanded aggressively since its 1976 founding. The company describes a "formal strategic partnership" with Erin Brockovich and has used TV ads featuring her endorsement as part of its marketing.
Shine recognises revenue using a formula based on billable hours worked by its lawyers, but cash flow only reflects bills actually paid by clients. For example, the firm reported $48.8 million of revenue in the first half of 2013 (with full-year revenue forecast above $100 million) while operating cash flow for the same period was just $4,000.
The cash decline was driven by acquisitions and capital spending: Shine bought a couple of new practices for $7 million and had $2.6 million in capital expenditure. After accounting for these and other items, cash on hand slumped by $8.7 million in the period reported.
Shine planned a partial float to raise $45 million at $1 a share, which would give new investors about 29% of the company. However, only $15 million of that $45 million is expected to flow to the company (before underwriting and other costs); the remainder is set to go to founders Simon Morrison and Stephen Roche in exchange for shares they are selling.
Under the float plan, Morrison and Roche would sell 30 million of their shares, netting proceeds that the prospectus indicates should reduce their combined stake to about 65%. The article also notes the arrangement should net the founders a combined amount in the order discussed in the prospectus.
Shine has told investors that payments are seasonal and expects the situation to improve by the end of the financial year. The company predicted operating cash flow would hit $8 million and net cash flow would be more than $10.5 million by year end, assuming the seasonal pattern reverses.
The article highlights that executive director Stephen Roche was suspended from practising law for a year in 2003 after the Queensland Solicitors Complaints Tribunal found him guilty of gross overcharging. The case cited included charging a client who received a $2 million settlement more than $570,000 in fees, with one billed item (sending chocolates) costing $156.
Based on the article, investors should be mindful that Shine's revenue recognition (based on billable hours) can differ materially from cash receipts, that recent acquisitions and capex have drained cash, and that founders are selling shares as part of the float. The company attributes short-term cash weakness to seasonality and projects stronger cash flow by year end, but these factors introduce timing and execution risk for investors.
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