A Portfolio of Cases
Litigation Investor, IMF Bentham (ASX:IMF) has released a flurry of case updates since our last coverage back in May. In today’s note, we look at the various case updates as well as the company’s Portfolio Update filing to see the progress it has made. Overall, we remain pleased with the company’s direction and like the strong pipeline of cases it has.
Accordingly, we maintain our BUY rating on the shares.
What’s New?
In our last coverage of the litigation financier back in May (FAT-AUS-871), we covered the company’s first half 2018 (1H18) results which disappointed the market as the company reported a net loss of A$4.39 million.
We did emphasise then that the company’s business model of funding class action cases would take several years before payoffs and would lead to lumpy performances in the near term. Thus, we view it somewhat akin to a long-term investment fund where the fund’s short-term performance can underperform the market until investments mature.
Starting with the case updates, the company announced on 21 May that its US Fund Case 6, funded via its US Investment arm and resolved on 19 January 2018 (FAT-AUS-859) has received approximately A$3.6 million, which generated a profit after capitalised overheads (but before tax) of approximately A$2.2 million. Putting this in perspective, this represents a multiplier of 1.7x of invested capital and ahead of the company’s 1.5x ROIC (Return on Invested Capital) target.
Aside from that happy ending, the company has provided updates on 4 of its ongoing domestic cases starting with the (i) January 2011 Brisbane Floods (Wivenhoe Dam) Case that was filed 8 July 2014. In the filing, the company noted that a Mediation between the parties had taken place on 21 and 22 June 2018.
In the announcement, the company emphasised that it should not be taken to mean than that the parties will discuss settlement. Nor would this mean that a court decision would not come through. Since then, there hasn’t been any updates in this arena and we look forward to further updates on this long running case.
The company also provide an update on the (ii) Katherine Class Action Suit which is currently being conducted by Shine Lawyers (ASX.SHS) – one of Australia’s leading litigation companies in environmental class actions – on behalf of the residents of the town.
The main point of the update is that it has now received unconditional funding from Rest of the World (ROW) Funds (Fund 2 and Fund 3) which is part of the company’s Special Purpose Vehicle (SPV) model. Exact dollar figures haven’t been specified.
The third case update was relating to the (iii) Murray Goulburn Investor Class Action which we briefly covered in our previous report (FAT-AUS-871). In the filing, the company noted that it has also received unconditional funding from its ROW Funds.
The final domestic case update is another shareholder class action suit and was covered in our previous report as well. The (iv) Brambles Ltd Class Action has also received unconditional funding from the company’s ROW Funds.
Aside from case updates, the company also announced 2 new pipeline cases, one via its US vehicle and the other will be funded via its ROW funds due to its international nature.
The first was announced last 12 June, dubbed US Fund Case 42 where IMF (ASX:IMF) will fund up to US$11.6 million. The new case involves the monetisation of a trade secrets misappropriation and breach of contract case which is being appealed by the defendant. The company hasn’t provided additional details on the cast yet. This now brings the company’s investments in the US to US$135.7 million since inception of the vehicle (01 February 2017).
The second case may be more distinctive as it involves social networking giant, Facebook (NASDAQ.FB). In the company’s 10 July 2018 filing, the company along with a leading Australian law firm, Johnson Winter & Slattery, announced that it has lodged a representative complaint the Office of the Australian Information Commissioner seeking compensation for Facebook users arising from the Cambridge Analytica data breach which it alleges violates the Australian Privacy Principles contained in the Privacy Act 1988.
Source: Company Websites
The company has also announced that, in the event that the commissioner would not produce a civil penalty award against Facebook or produce a recovery for the victims, it may fund a Class Action suit against Facebook. Considering the timing of filing, we believe it’s too early to tell how this will unfold and we will continue to monitor developments in this space as well.
Investment Portfolio Update
The company has also filed a portfolio update for the June Quarter. In it the company has announced unconditional funding of 7 cases and includes the cases mentioned in the previous section. That side, the company has also withdrawn 2 investments in Australia which has resulted in a capitalised cost of A$0.7 million.
Looking at the breakdown and starting with the ROW funds, since inception (October 2017), the company has committed slightly over half of the available capacity and this is reflected in the graphic below:
Source: 20 July 2018 Company Filing
The company’s international (Non-USA) investments now have an EPV – the company’s current best estimate of a claim’s recoverable amount – of A$2.832 billion based on 33 ongoing cases.
Source: 20 July 2018 Company Filing
Whereas on the US side, EPV is pegged at circa A$2.77 billion on the back of a total US$187.3 million commitment dispersed over 42 case investments. These are summarised in the graphics below:
Source: 20 July 2018 Company Filing
Going forward, as the company builds up its case portfolio in the US, we are keenly looking at the ROIC metrics here. So far, out of 17 realised cases, the company has delivered only a 1.0x ROIC multiplier which lags the company’s track record of 1.5x and Non-US investments of 1.4x. The sample size is still small (17 vs 166) though and we would caution drawing too much of a comparison at this early stage. A few significant successes could result in a larger multiplier down the road.
That said, we look forward to the company’s FY18 Results Release due 23 August 2018 to have a clearer look at the company’s progress for the year.
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.
With reference to the monthly chart, prices have closed (on a monthly-basis) above the 78.6% Fibonacci retracement of $2.15. This is a positive and have also seen a 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.
Summary
Since our last review, the company has provided a plethora of case updates from its Australian and International Investments. So far, we are pleased with the progress it continues to make especially with the continuous flow of suitable case investments.
Over the longer term, 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.
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.
