Future Looks Bright For Shine Corp

This story features SHINE JUSTICE LIMITED, and other companies. For more info SHARE ANALYSIS: SHJ

-To improve WIP recoverability
-Brand recognition growing
-Market consolidation opportunities
 

By Eva Brocklehurst

Lawyers Shine Corporation ((SHJ)) have produced consistent earnings growth since listing in May 2013 and the latest half year results were no exception. Brokers are upbeat about the stock, given the potential to expand via internal growth and acquisitions. The company maintains a clear strategy and this underpins confidence. Since listing, Bell Potter observes Shine has demonstrated a high level of visibility and risk control as well as an ability to forecast accurately.

The company is redeveloping its systems to enable personalised case management, with a goal to improve work-in-progress (WIP) recoverability. WIP is a key component of the company's business model. At financial year end it consists of the value of chargeable time incurred on open client files that have not yet been billed, net of provisions. Growth in WIP is the lead indicator of revenue growth, given the company has a 98% success rate, Morgans observes. Moreover, Bell Potter believes there is an opportunity to lift WIP recoverability by 10% over the medium term, corresponding to $12-13m in additional earnings.

Brand recognition is improving outside Queensland and the company's special practice areas are also building momentum. Third party disbursement funding has commenced recently and Bell Potter expects this will boost free cash flow and support growth. Furthermore, market consolidation opportunities abound and should continue for a further 5-10 years. The broker updates the peer comparatives used in its valuation and lifts its target for Shine to $3.58 from $3.45. A Buy rating is retained.

Morgans finds plenty of catalysts to drive the share price, with the inclusion of the stock in the ASX300 from March 20. Further acquisitions are also highly likely, supported by an under-geared balance sheet. This broker also lauds visibility on growth into FY16, with several prospects in the pipeline which should expand the company's geographical presence in personal injury or emerging practice areas.

Morgans reviews its analysis of the stock as well and notes, while continuing to expect Shine will benefit from a fragmented market, the organic growth profile is robust. The company's cash flow conversion rate may be much lower than competitor Slater & Gordon's ((SGH)) but this is attributed to higher organic growth. Over time, cash flow generation is expected to improve via a reduction in case life cycles to 15 months from 18 months on average. Further third party disbursement funding should also help.

Some market participants have criticised the level of cash flow in the first half result but Morgans maintains this does not take into account seasonal weakness. Cash flow generation is strongest in the fourth quarter as bills are generally issued just prior to the end of the financial year in June, and insurers try to push settlements at that stage to remove the cases from their books. Morgans retains an Add rating with a $3.58 target, noting the stock offers a reasonably defensive investment that is not correlated to the broader economy.
 

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