Still A Strong Case
Global Litigation Financier, IMF Bentham (ASX:IMF) recently released its First Half of 2018 results numbers which seems to have disappointed the market as the shares have been drifting down since its release in late February. The results this time around highlighted the issues of its legacy business model which runs the risk of lumpy returns. Nevertheless, the company is making good progress in its transition into a superior business model with lower risk via a different funding scheme.
Turning to the charts, and on the daily, initial support sighted at the 50-day moving average (red line) followed by the February intra-month low of $2.73 (horizontal blue line) have both given way. It should however be noted that the strength of the underlying rally in share price since mid-January had driven the shares into overbought territory, and prices have weakened back towards this region. We may now expect a period of consolidation, before the shares can attempt to surmount the $2.73 mark which is now a layer of resistance.
What’s New?
Since our last coverage back in February (FAT-AUS-859), IMF Bentham (ASX:IMF) has provided a few updates from some of its ongoing cases and some new ones as well as its First Half 2018 (1H18) performance results. Before we go into detail on the interim results, let’s take a look at some of the case updates:
First, the company announced that it transferred its conditional funding of contractual breach claims with GBC Oil Company against the Republic of Albania to its Rest of the World (ROW) Special Purpose Vehicle (SPV) Fund. This transitions it into an unconditionally funded investment while GBC Oil has agreed to repurchase its debt. This move minimises the company’s risk on this particular case.
Second, the company’s case against former financial advisor Todd Michael King, Glenice King, Leveraged Equities Ltd and ASAS had a mixed result with the court awarding against the financial advisors while dismissing the institutions, though costs have yet to be ruled upon. Given that, the company has advised that this will result in a loss on its $1.82 million investment. This however, does not impact its other investment (class action) against ASAS which is still ongoing.
On a more positive note, the company has also announced three more case investments in the month of April. First is a class action against members of the Murray Goulburnwhich will be funded via its ROW SPV though case specifics haven’t been announced.
Another is a class action against Brambles Ltd where current and former shareholders claim that Brambles breached its obligations on continuous disclosure and made misleading representations on its expected sales growth for FY 2017. This will also be funded via the ROW SPV.
Finally, the latest is the shareholder class action against Australia’s largest listed wealth manager, AMP, and following the revelations of misconduct at the Financial Services Royal Commission. This will be funded by the company’s ROW SPV. This brings the aggregate commitments in its ROW SPV to 15 cases, estimated to be circa $60 million and representing almost 50% of the available fund capacity.
So far, we are pleased with the company’s progress in its efforts to build up its case portfolio. The figure below portrays the latest case commitments (actual and budgeted) at the group level:
Source: 22 February 2018 Company Presentation
With those in mind, we move on to the recently released Interim Performance numbers:
1H18 Results Review
Considering IMF Bentham’s business model which is funding class action against companies which can take several years to bear fruit, this will naturally lead to lumpy revenues and periods of lower than average inflows as the company waits for some cases to be resolved. According to management, the average length of cases is 2.6 years and the average return on invested capital is 1.5 times, including lost cases.
Given this we believe that IMF Bentham (ASX:IMF) can be viewed akin to a traditional value investing fund where the fund’s short-term performance can underperform the market as the investment picks take time to payoff. Thus, the best way to treat the company is based on a longer-term view and with its track record of success, we remain confident in its long run potential. The graphic below summarises the aforementioned:
Source: 23 February 2018 Company Presentation
Moving on to the shorter term, the company’s performance this 1H18 period reflects the short-term lumpiness that we noted above. Net Revenues (Net Income from Cases) for the period were done 59.2 % year-on-year to $12.7 million. This lower year-on-year result was nevertheless in-line with consensus expectations as the company has being providing progress updates on case performances.
This time around, the company generated income from 3 out of its 4 cases resolved in the period compared to the previous year’s 6 resolved cases, hence the decline. However, on a case pipeline basis our view remains positive given that there are still about 80 cases ongoing, including the new cases noted in the preceding section.
Source: 23 February 2018 Company Presentation
Before moving on we also want to note that Litigation Expenses this time around were slightly higher (+1.4%) year-on-year at circa $36.1 million mainly due the USA Fund Case 003 arbitration claim that was dismissed by the court, costing (in the form of cashless write-down) $4.036 million. This was already factored into our expectations, and was covered in our previous review (FAT-AUS-859).
That aside, the other major drag on case costs were the “Confidential Hong Kong Matter” which, despite a favourable settlement, generated a much lower profit of 4.55% (~$790k) due to a substantially high cost of $16.58 million on income of $17.37 million.
Operating expenses were also roughly stable this period at $15.4 million (+1.3% yoy) as management implemented cost cutting measures leading to lower corporate and office costs. Although, this was offset by a substantial 11.5% year-on-year increase in employee expenses to $10.81 million due to recent additions to the team.
Overall, IMF Bentham (ASX:IMF) ended the 1H18 with a net loss of $4.39 million compared to last year’s profit of $13.99 million. Again, we note such variation in results (lower ROIC or lost cases) is to be expected for IMF Bentham but the fact that this period had a fewer number of total cases resolved exacerbated results this time around. In our view, this provides further validation of management’s longer-term view (five-year business transformation plan) to diversify the investment portfolio away from idiosyncratic case risks.
Outlook
Similar to previous reporting periods, management continues to refrain from providing explicit earnings guidance. It is understandable considering the timing of case resolutions is highly unpredictable and rely on an arbiter for a final say.
That said, we remain upbeat in the company’s long-term earnings potential given its solid overseas footprint expansion into both existing and new markets. A transition to SPV funding will also minimise risk while facilitate growth ambitions in Asia, Canada, the UK and Europe.
With reference to the monthly chart, prices have closed (on a monthly-basis) above the 78.6% Fibonacci retracement of $2.15 (red set of retracements). This is a positive and we will be looking for a sustained move back above support at $2.48. From here an initial target of $2.91, being the 127.2% Fibonacci extension, is sighted, along with 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’s result this time around highlighted the issues of its legacy business model which runs the risk of lumpy returns while cases are still ongoing. Nevertheless, we are pleased with the company’s progress so far and look forward to the completed transition.
We continue to have a positive investment stance on IMF Bentham (ASX:IMF). 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.
That aside, once the company transitions, it will be able to leverage its Intellectual Property and fixed cost base whilst having favourable funding terms from the Special Purpose Vehicle funding. Factoring in the slippages (you can’t win them all), we expect stronger earnings and free cash flow generation.
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.
