Leveraging US Partnerships Will Expand Class Action Business In Australia

Key Takeaways

• Shine Justice aims to expand its market share in personal injury in Australia, leveraging Tier 2 and Tier 3 law firms for growth.
  
• The strategy involves simplifying operations and leveraging U.S. partnerships to enhance growth, margins, and earnings stability through improved cash flow.
  
• Shine Justice faces challenges in sustaining growth due to declining revenue and EBITDA, reliance on litigation funding, and exposure to wage inflation and legacy project risks.

Catalysts

Through its subsidiaries, provides damages-based plaintiff litigation legal services in Australia and New Zealand.

• Shine Justice is focusing on expanding its market share in the large and fragmented personal injury market in Australia, which could drive revenue growth. By targeting Tier 2 and Tier 3 law firms, they aim to double the business over the next decade. This strategy impacts potential revenue growth.
  
• The company plans to drive future earnings growth by simplifying business operations to concentrate on core areas like personal injury and class actions, which they know they can grow at scale. This strategic focus could enhance net margins due to operational efficiencies.
  
• Shine’s strategy to bring more U.S. class action cases to Australia and leverage partnerships with U.S. lawyers could significantly increase their class action business, potentially boosting earnings over time.
  
• The company is prioritizing the expansion of their footprint, especially in regional areas, driven by a focus on bringing specialist lawyers to underserved regions, which could support both revenue and market position.
  
• Shine Justice has a strong emphasis on improving cash conversion rates by accelerating case resolutions and reducing aged case inventories, expected to enhance cash flow and support earnings stability.

Shine Justice Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Shine Justice's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.1% today to 8.4% in 3 years time.
• Analysts expect earnings to reach A$18.3 million (and earnings per share of A$0.11) by about February 2028, up from A$6.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.2x on those 2028 earnings, down from 20.8x today. This future PE is lower than the current PE for the AU Consumer Services industry at 18.8x.
• Analysts expect the number of shares outstanding to decline by 2.74% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Shine Justice Future Earnings Per Share Growth

Risks

• Shine Justice's revenue was down 12% in FY '24, and adjusted EBITDA was down 26%, indicating potential challenges in sustaining growth and profitability. This decline could impact future earnings and net margins.
  
• The class actions segment experienced a 28% decrease in revenue and a decline in EBITDA margin, partly due to the loss of key cases and write-offs. This volatility in such a critical segment could negatively affect overall revenue stability.
  
• Wage inflation and skilled labor availability remain concerns. While the company uses strategies like recruiting from the UK, persistent wage pressure could increase operational costs and squeeze net margins.
  
• The company's reliance on litigation funding, which constitutes 74% of their cases, introduces risk. Changes in funding availability or terms could affect cash flow and revenue generation.
  
• The firm's exposure to legacy self-funded class actions led to substantial write-offs, pointing to potential future risks in project selection and funding strategy, impacting cash conversion and profitability.

Valuation

• The analysts have a consensus price target of A$0.865 for Shine Justice based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$216.9 million, earnings will come to A$18.3 million, and it would be trading on a PE ratio of 9.2x, assuming you use a discount rate of 7.3%.
  
• Given the current share price of A$0.75, the analyst price target of A$0.86 is 13.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.