Shine Justice Ltd (SHJ) Earnings Call Transcript

Thank you for standing by, and welcome to the Shine Justice Limited FY '20 Results Teleconference. [Operator Instructions] I would now like to hand the conference over to Mr. Simon Morrison, Managing Director and CEO. Please go ahead.

Thank you, Ari, and welcome, everyone, to Shine Justice FY '20 Results. May I just introduce our team for this morning. Firstly, Ravin Raj, the company's CFO. Ravin is a chartered accountant by training, came out of Touche Ross, a very experienced public company CFO, having been the CFO at Watpac Limited for many years. John George, Head of Investor Relations, John himself a former director of Shine and a former executive at Shine, former roles at ASIC and currently himself a director of the publicly listed companies. I'm the Managing Director and CEO of Shine. I've been with the company 32 years, firstly -- or for many years as a litigation lawyer in most areas, and then the more recent part of my career in management. So if we go to Slide 6 to get the presentation underway. Look, in short, it's been a good year for Shine. We've had a very good year. Revenue was very solid for the company. Earnings and cash well up. We met guidance, which we were very happy with. Very happy to declare a final dividend of $0.0275, bringing the full year dividend to $0.0425 and the earnings per share up to $0.124. Ravin will drill in more detail into the numbers in a moment. If we move to Slide 7, just a bit of an overview of the year. It's been a tough year for many companies in light of the COVID world that we all live in, but Shine has handled that remarkably well. We've achieved solid earnings growth, delivered on guidance, notwithstanding all the challenges of COVID, and we'll come to those in a moment. More importantly, we've been able to quietly set a platform for the next phase of growth and notwithstanding COVID impacts that we have baked into the forthcoming year, we are expecting to keep growing. Pleasingly, our new client inquiries and leads are up for FY '21. We're ahead of target on new openings, which is a great position for Shine to be. As you know, we were successful in our Mesh class action receiving an historic judgment from the Federal Court. We are currently in the process of recovering our costs from that action pursuant to the order, and we will keep the market appraised of those developments. The registration process has now been complete, and there has been a massive increase in the number of women who have come forward and registered for this class action, and that will create a pipeline of work for several years to come. The judgment, of course, is under appeal, but that appeal will be vigorously opposed. The other thing we've been working quietly on is building up our class action pipeline, and I'll give you some more detail a bit further in the presentation. But the team have done a remarkable job to set a pathway of future revenues in that part of our business. Ravin and his team have kept working on both our litigation and disbursements funding strategies, which are bearing fruit for the company. And finally, we've continued to test the technology in our new Claimify offering and seeing good results. So we are now bringing that technology to other parts of our business to improve its performance. So on that note, I'll pass over to Ravin to walk us through the financials. Thanks. Ravin?

Thank you, Simon. I'll just give a quick overview before we go through the financials. Just to remind everyone that the financial statements now reflect the adoption -- the full adoption of 3 new accounting standards: AASB 9, AASB 15 and AASB 16. It's AASB 15 and 16 that have had the most impact in the business. And long -- in the medium term, AASB 16 will continue to have impact because it will provide variability to our financial results as our existing leases mature, and then we renew them. So there will be variability in statutory numbers. So in the long term, we'll continue to report underlying as well as AASB 16 statutory results. In looking at the results for FY '20, revenue, you'll note that revenue was relatively stable at $183 million, up 2.9%. Our net profit after tax was actually up 53.6% to $21.55 million. Now last year, we had a -- we recorded an impairment in FY '19. So if you want to take that into account and not include it in the results, then our underlying NPAT was up 13.2% at $21.55 million. So it's still a pretty good result. EBITDAI, which includes the AASB statutory results, was up 7.8% at $51.15 million. But our underlying performance, excluding AASB 16 was at $42.52 million, up from $38.33 million, and that was at 10.9%, which was in line with our FY '20 guidance. Our gross operating cash flow was strong, including AASB 16, it's up 10.5%. But if you take AASB 15 -- AASB 16 out of that result, we're actually up 17.1% at $25.93 million. Our final dividend was up 10% at $0.0275 per share. And our full year dividend is up 13.3%, in line with NPAT growth. In looking at the numbers in a little bit more detail. Revenue, as I said, revenue was up 2.9%. That's a marginal increase in revenue. But when you look at it on a segment result, you will note that there's been a drop in core PI revenue of about 4%, and that's mainly due to higher write-offs in core PI in Queensland and Victoria. But our new practice areas, they grew by 15.9%. And we have growth areas in the business, which are in abuse business and superannuation business. We had the full year impact of the Carr acquisition in Western Australia, and we've also had growth in our dust business. So while revenue was up 2.9%, NPAT was actually up 53%. And again, NPAT has grown faster than revenue, mainly because of the improved performance in those businesses that we talked about, plus also, we've turned -- you might remember it, last couple of years, we've talked about the fact that we're restructuring a number of businesses, and they are now starting to bear fruit, and the commercial disputes business is an example of that. Overall, expenses were controlled really well. When you analyze the results, marketing was up $1 million. But when you aggregate all the expenses, in real terms, with -- expenses have gone up. If you take inflation into account, expenses have actually gone backwards. Moving to Slide 10. As Simon indicated, underlying EPS was $0.124 per share. That's an increase of 53.8%. The final dividend was $0.0275, unfranked, up at 10%. Total FY '20 payment is $0.0425 per share, up 13.3%. The dividend payout ratio is 34%, which is at the lower end of the broad range, notwithstanding -- but it's still a good increase on the prior year. If we go to the next slide, which is the balance sheet, Shine has a very strong balance sheet. Cash on hand has grown when you compare it to the previous year and the year before that. In terms of WIP, we've had strong growth, as I said in our reviews, dust businesses. That's resulted in WIP going up in the business. Our disbursement creditors have grown in line with that WIP growth. You'll see a marginal drop in borrowings. Our debt/equity ratio, if you take out the impact of AASB 16, is pretty low at 22%, and you'll see also net growth in net assets after allowing for the payment of the dividend. Moving to the next slide. Gross operating cash flow. That's a waterfall chart of our gross operating cash flow in terms of first half, second half. We are working to try and even that -- the contribution of GOCF throughout the year, but we're working on that. It's not that easy to do in terms of insurance company behavior. Notwithstanding that, our GOCF that we're reporting is up 10.5% on last year. Underlying GOCF after taking AASB 16 out, it was up 17.1%. So overall conversion, underlying conversion of GOCF is 61%, and our target is to now move that up somewhere between 70% and 80%. The next page shows that our GOCF strategies are actually working. And one of the key elements of that GOCF strategy has been to eliminate Shine-funded disbursements. And we commenced this strategy 2 years ago. It's certainly bearing fruit. And the strategies were introduced a disbursement funder, and we introduced a quality disbursement funder 24 months ago, and that's working well. And 2 years ago, we said that all new class actions needed to be litigation funded, and they are now being litigation funded. So we're not using Shine equity funds to fund disbursements anymore, and that's also assisting in improving our overall cash flow. That's it for the financial summary. I'll pass back over to Simon Morrison.

Thanks, Ravin. If we now go to Slide 15. Firstly, we've done a lot of work to diversify our -- both our practice areas and our geographies across Australia and New Zealand. So we now think we have a very good diversified footprint on both those issues. As we announced, we changed our company name earlier this year from Shine Corporate to Shine Justice, largely to reflect the work that we do. We are a purpose-driven company. We are in the game of correcting wrongs. And regardless of what's happening in the world, we expect, sadly, that will continue. As has been demonstrated in a pretty challenging year with COVID, we've been able to show that we are relatively immune to a lot of the economic cycles that are impacted by extrinsic events. So we are in that sense a true defensive stock. And the third thing, as I've touched on, we've been quietly preparing now for the next phase of growth. And there are a couple of significant growth opportunities that I'd like to walk you through. So if we turn to Slide 16, I want to start with our class actions practice. As I mentioned, we've been steadily building our pipeline of actions. We now have 37 class actions on our books at Shine, 16 of those are currently filed and in the courts, and a further 21 cases are in their investigation phases. Importantly, for us, we have quite a diversified mix of class action types, which, we think, will stand us in very good stead for any potential reforms that may come, and I'll touch on those a little bit later. In the PI market, where we're going to focus our attention, particularly in the FY '21 year is -- and you'll see from the pie chart, there's not much in it between the 3 large firms in terms of our market share, but penetrating the rest of the open market is something that we're doing some work on to improve. If we turn to Slide 17, we did announce a Board renewal program, and that has now been completed. I did want to formally acknowledge and thank our outgoing Board. Chairman, Tony Bellas; Directors, Greg Moynihan and Carolyn Barker, have been with us from the start when we listed the company back in 2013, and have certainly set us up for future success. So we are most grateful for that. We are thrilled at our incoming Board and the caliber of directors that have signed on to the Shine Board. Firstly, our Chairman, Graham Bradley, who is well-known in corporate circles, currently Chairs HSBC Bank Australia, EnergyAustralia and United Malt Group. He's the Director of the parent HSBC company. Graham himself is a lawyer by training. He was the managing partner of Blake Dawson Waldron here in Australia. He's held roles at McKinsey. He was also the Managing Director of Perpetual and comes with vast experience. In the short time we've had with Graham, his influence is profound already on the company. Teresa Dyson is also a lawyer by training, a tax lawyer. She currently sits on the Seven West Media Board, Power & Water Corp. and Genex, to name a few. Teresa heads our IR&C and is doing a mighty job. And David Bayes joins us as a non-Executive Director. David sits on Sigma Healthcare Board. He's a former CEO of Bakers Delight and COO of Mortgage Choice. He was in the McDonald's system for many years, ranging from owning stores right up to in the executive team. And his skills in multisite businesses are already coming to the fore assisting Shine. So we think we have a great suite of new directors to help us in the next phase of our journey. If we now move to Slide 18, a couple of things I'd like to update the market on. Firstly, regulatory updates. You may be aware that for the first time in Australian legal history, a parliament has passed laws to permit contingency fees by lawyers. So the Victorian parliament has passed those laws that will apply to class actions in Victoria. We think that will create some significant opportunities as we move forward. On the Commonwealth front, as you are probably aware, there is a parliamentary inquiry going on in respect to both litigation funding and class actions. The Treasurer has already announced some regulation changes in respect to funders, being the requirement to hold an AFSL license and the declaration that class actions with more than 20 members are deemed to be managed investment schemes. There is a bit of discussion going on about both of those forms of regulation. Our view of the world is we encourage regulation of litigation funders, but not at the expense of giving people access to class actions. We expect there may be some reform in respect to securities class actions. As I indicated earlier, we have a very broad mix of class actions. So we don't expect to be impacted by either of those reforms in any meaningful way. Indeed, we see some opportunities for Shine, particularly. We then turn to COVID. So COVID has impacted our business like others, but the reaction to that impact has been swift and successful. Fortunately, our work is what we call long-tail work. So we typically have years of work on our books that will see us through any extrinsic changes. Like most businesses, we had to change quickly to remote working. And surprisingly, after probably a week of transitioning in with a few challenges, our outputs have actually been better in a remote environment. We still have about 70% of our workforce working remotely and doing it successfully. So we have learned a lot of things from this change that we think will help our business moving forward. If we can then turn to Slide 20, just to give you a snapshot of what's on our minds in the coming year for Shine. As I mentioned before, we are focusing on growth this year. We had baked in expected COVID impacts into our forecasting for FY '21, and notwithstanding that we are expecting further earnings growth in the year ahead, in particular in our class actions practice and our PI practice. Under the bonnet where we will continue to try and improve on our WIP management and conversion cycles, as Ravin touched on, work done on that area in FY '20 has yielded very good results for the company. So we will stick at that. On the technology front, as I indicated, the innovations that we have developed in Claimify, we are now moving to other parts of Shine. So we've started with our disability insurance and super practice and also our WIRO, workers' comp practice in New South Wales, and we expect good things from those changes. And finally, we're focusing on improving our communications with our own clients, and using new digital platforms to get access to more people. In terms of guidance, as I indicated, we do expect continuation of EBITDAI growth in FY '21, and we pegged guidance in the order of high single digits, baking in expected changes on COVID for our company, with the only qualification on the guidance that it's subject to any unforeseen COVID impacts. So that completes the presentation. Very happy to take questions.

[Operator Instructions] Our first question today is from James Lawrence of Morgans.

Congratulations on a nice set of numbers. I was just wondering if you could talk a bit about just the PI business and what you saw there, and obviously you've kind of touched on just the top line decline. But if you could just elaborate on that a bit more? And also, just obviously, EBITDA got squeezed a bit more, so carrying people or what's happening?

Yes. Well, I'll take the first part, James, and I'll hand to Ravin for the second. It's a mixed story across the country in relation to PI. So there are some parts of our geography where it's fiercely competitive, and we felt that in FY '20, Queensland would be one of those markets, but we do expect some key improvements in FY '21. Places like Victoria are growing well organically for us. So we have some ups and downs when you look across the whole operation in the country. But generally, it's pretty stable. On the EBITDA question, Ravin, do you want to chip in there?

Yes, just to add a bit more color to what Simon said. A couple of years ago, James, we used to have the business -- the PI business split into core. And then we also had a low-cost PI business called Shine Direct. And probably incorrectly in hindsight, we've made the decision to move Shine Direct into our core business. And what that resulted in was that higher costs were applied into that Shine Direct business, which was originally based as a low-cost business. And that's why when we actually settled those cases, we had write-offs in Queensland. Normally, Queensland is the powerhouse in the business. But it was, I think, looking in hindsight, probably not a great strategy to merge that business into PI. From a growth point of view, when we look at file growth, I mean, files in a post-COVID environment, and we've been in COVID now for 4 months, there has been a marginal drop in files, but the actual dollar value of each file, average fee per file and the new file fees are up significantly. So we're hoping that, that was just a one-off blip in PI. The margin -- the EBITDA margin has remained consistent relatively over the last 2 years. But yes, it was a bit of a surprise when we resulted in the Shine Direct impact on Queensland PI.

Okay. That's great. And then could you just -- I mean you flagged it before, just obviously a good performance on costs. I mean how sustainable is that in this environment? And you've been working hard at them for a number of years now. I mean, is there much more you can do on the cost side of things?

Do you want to go, Ravin?

Well, Simon and I have different views on this. I believe we've done a great job if you look at over the last 3 years in reducing overhead costs in the business. COVID probably throws up some interesting opportunities, which we -- I'm going to discount those for the moment. But certainly, I think we're operating pretty much at the bone when it comes to overhead cost change.

Okay. Fantastic. And if I may, one more...

Simon?

Sorry, Ravin?

Did you want to add to that?

James, I'm Scottish, I'm always of the view that you can improve your cost base.

All right. And now just quickly one more. Just obviously guidance looks really solid heading into '21. Can you just talk about kind of how you're thinking about it across the 2 businesses?

Yes. So let's start with the class action practice. One helpful outcome from the announcement by the Treasurer in respect to regulation of funders is he put a sunset date on when that would be effective from, which was the 22nd of August. The consequence from that is a lot of cases that were under consideration quickly accelerated into being filed. So we were fortunate to be able to file a number of cases that are now up and running, for which we will be able to recognize revenue that otherwise might have had a longer period in investigations. So that's certainly going to help revenue on that side of the business. Across the PI business, look, it's a pretty stable story in terms of where the growth is coming from. It's underlying improvement in how we're actually managing the cases, that's probably the biggest leg up that I would point to. But Ravin, do you want to add anything to that?

No, I think that you've covered it, Simon.

Our next question is from Nick Caley of Baillieu.

Just a quick one, what do we -- I know, obviously, the 3 big ones dominate the PI market, but you're seeing much strain in the lower levels, just given the sort of costs associated with remote working and you had knocks on the door, people trying to get your attention to take them over?