Spreading the wings
In a span of a couple of months since our last coverage in December (FAT-AUS-852), IMF Bentham (ASX:IMF) has provided numerous updates, mostly operational in nature and generally positive in our opinion. In fact, this is also a view shared by the market as can be seen with the company’s share price rallying around 18% in that time. A few key developments also support the rerating to the upside in our view.
What’s New
Since our last update, IMF has provided updates on various cases, along with some expansionary activities:
First off were the case updates with the UGL and Sirtex Medical class action suits in December, where IMF is unconditionally funding the litigation. The company is also tapping into Funds 2 and 3 to meet on-going funding obligations in the Commonwealth Bank of Australia class action suit. Note that this move implies that the company is fairly confident in the cases involved, given a knack of backing winners (IMF has settled or won 91% of 162 completed cases).
This also means they ‘know when to fold ‘em’ and IMF has announced that it will withdraw from the previously announced conditional funding of a shareholder class action against Woolworths as it failed to meet investment criteria and will lead to a write off of circa A$151,000. As no proceedings were commenced, IMF has no potential liability for adverse costs.
While in the Americas region, the company has announced that management has recently approved funding for two additional investments in Canada, demonstrating the further development and maturing nature of operations in the country. Though management hasn’t provided explicit market share, Canada’s legal services market size is worth A$25 billion annually and is expected to grow at a pace of 0.9% p.a, with the company set to grab a larger share due to strong branding and track record.
Major inroads have also been achieved in the much larger US market (~A$300-400 billion) with US Case 36 receiving a A$2.9 million settlement. The fairly new case (announced in 07 August 2017) generated a profit after capitalized overheads (before tax) of approximately A$1.75 million, representing an impressive return on invested capital of 1.9 times and an IRR of 103%.
Though it wasn’t all sunshine and rainbows in the “Land of the Free” as IMF announced mixed results from the outcome of two investments made by US Fund 1, with one resulting in a conditional settlement and the other in the dismissal of the claim. In the event of an unconditional settlement the first case will see Fund 1 recognise revenue of approximately A$3.5 million and profit after capitalised overheads of approximately A$2.1 million. The other case has ended in a write down of intangible assets by approximately A$4 million though there is no cash impact resulting from this decision.
The company has also been on the expansion trail, with the re-establishment of European operations. Management considers the European market to be an area of considerable potential growth and is currently evaluating its options in the region, engaging Mr Alistair Croft, a former senior litigator, given his funding experience in European cases. Specifically, his experience involves funding large shareholder actions both in England and Germany, where he has advised on funded claims valued at over €2 billion.
Source: 31 January 2018 Investor Presentation
The company is also expanding its capacity and presence in Asia with the hiring of Ms Cheng Yee Khong as an Associate Investment Manager. She joins Mr Clive Bowman (CEO Australia & Asia) along with more Messrs Tom Glasgow and Olive Gayner to cover Asia’s operations which are currently based in Singapore. Ms Khong’s appointment is mainly to capture opportunities in Hong Kong and mainland China which are growing markets for international dispute resolution following recent legislative amendments.
We now turn to the company’s latest portfolio update as at 31 December 2017. As we’ve previously noted in our December report (FAT-AUS-852), the company launched two new investment vehicles (Fund 2 & 3) to fund investments outside the US, specifically in Australia, Asia, Canada and Europe.
Source: 31 January 2018 Investor Presentation
IMF has also since added 10 new investments to the Total Investment Portfolio bringing it to 77 investments, comprising 44 US investments worth an Estimated Portfolio Value (EPV) of over A$163 million and 33 investments outside the US worth A$2.1 billion.
While the December quarter led to just 2 investment completions, when coupled with revenue earned from both ongoing investments in the US, and Australian investments completed in prior periods, this delivered gross revenues of $31 million.
Andfinally, the most salient development, in our view, is the company’s announcement that it is selling the majority of its US investment portfolio to IMF’s Fund 1. This move is highly prudent as it allows IMF to monetise substantial intangible assets (ongoing cases) while also retaining a significant upside returns (if any) and more importantly, reduce the downside risk.
In the arrangement, IMF will receive a cash payment of US$57.4 million from the Fund 1 while leaving behind an investment of US$9.6 million as its pro rata contribution. In effect, the company will be able to liberate US$47.8 million in cash which can then be redeployed to other cases/investments.
The graphic below illustrates the company’s forecasted values for cases, which are increasingly likely given the liberation of that capital. Growth is mainly derived from the addition of Investment Managers (covered above), launch of new product offerings and, increased targets for funding for Investment Managers.
Source: 31 January 2018 Investor Presentation
IMF will also remain entitled to 85% of any profits realised by Fund 1 after Fortress (the partner in Fund 1) receives in priority its return of capital, preferred return and 15% of the residual profit. Though before splitting the profits of Fund 1, IMF is at least entitled to a return of capital and a management fee. The sale was completed yesterday.
All in all, we view this development as a significant milestone for the company as this shows the successful, though still ongoing, transition, from IMF managing its own balance sheet to managing third party capital while simultaneously reducing risks.
Turning to the charts, and on the daily, initial support is sighted at the 50-day moving average (red line) of $2.91, followed by the February intra-month low of $2.73 (horizontal blue line). It should be noted that the strength of the underlying rally in share price since mid-January (i.e. from the $30.00 region) has led the RSI to rise into overbought territory, and prices have weakened from this region. As such, short-term upward momentum may fade in due course.
That said, from a broader standpoint, the share price of IMF Bentham (ASX:IMF) remains above both the 50 (red line) and 200 (green line) day moving averages, which signal’s medium-term momentum to remain in favour of the bull-camp. For this reason, and from a probability perspective, an eventual challenge of the February intra-month high of $3.33 (horizontal red line) would be the more likely route, moving forward.
With reference to the monthly chart, support was respected at the 61.8% Fibonacci retracement (golden ratio – blue set of retracements) at $1.04 in February 2016. This has resulted in a firm rotational shift in upward momentum to-date. Moving forward, prices have closed (on a monthly-basis) above the 78.6% Fibonacci retracement of $2.15 (red set of retracements) in October 2017. This is a bullish event and has activated two additional upside targets. The initial target of $2.91, being the 127.2% Fibonacci extension, has been achieved, which now leaves the 161.8% Fibonacci extension of $3.45 as the next focal point of resistance. Though, over the near term, a period of weakness is evident, overall, the long-term uptrend remains firmly intact, and will likely dictate the broader direction of IMF Bentham (ASX:IMF).
Summary
IMF Bentham (ASX:IMF) is a leader in the growing field of litigation funding and has expanded from a strong base in Australia to overseas opportunities in recent years. The company has also had a good start for the year, securing new cases while simultaneously shoring up financial backing with the launch of new funds.
We continue to have a positive investment stance on IMF Bentham. This is based on our expectation that the breadth and depth of the company’s case portfolio and funding capability, in combination with its longer-term track record on case outcomes, provide a solid platform from which to generate attractive future returns for shareholders.
Accordingly, IMF Bentham (ASX:IMF) will remain firmly held in the Fat Prophets portfolio. For Members with no current exposure to IMF Bentham (ASX:IMF), we rate the company’s shares as a buy.
