Monday, August 27, 2012

IMF (Australia) Ltd -- Litigation Finance


IMF (Australia) Ltd (IMF) funds lawsuits, primarily in Australia where it pioneered its business model and now dominates this niche activity. 

IMF is approached with prospective business by claimants or their lawyers, and elects to finance those cases that it believes will have a high probability of paying out three times its investment within two and a half years – about 3% to 4% of the deal flow.

Between its listing ten years ago, and June of this year, IMF’s performance has lived up to this objective: it has funded 137 completed cases, 93 of which were settled, 12 won at trial, and 5 lost. (In addition, IMF withdrew from 27 cases).  The average gross return on its investment in these cases has been 310% every 2.3 years.

And, with time and with the available funds that success has brought, the investment book has grown: the cases are bigger and there are more of them, even as the discipline that fathered the success – 3% to 4% of deal flow – has remained tight.  The benefits of learning are also evident – the time to completion, for example, has shortened, the case ROI strengthened, and the unallocated overhead shrunk as a percentage of revenue. 

That’s the business in a nutshell. Let’s now build up a valuation.

IMF has AUD$ 62.4 million in cash, a convertible debt liability of $35 million, and a net tangible book value of $52 million, or 35 cents per share. (The convertible debt will likely be paid off in December of this year).

In addition, the (direct and indirect) costs incurred in the current, unresolved case load are capitalized and carried on the books as intangible assets valued at $66 million. If the cases are resolved in a manner consistent to IMF’s past portfolio, the current caseload will generate revenues of (3.1*62 =) $192 million over the next two and a half years, of which 60%, or $115 million, will flow to the profit line. That’s an additional 79 cents per share in value, bringing us to $1.13.

Australia is, by now, a more or less mature market for litigation finance, and IMF has established a presence in New York to tap into the American litigation funding opportunity. In the United States, the deal flow is likely to be better, much better, and, as they say in litigation finance, there’s no business like flow business.*

The shares are trading at $1.50. For the extra 37 cents one would receive the proceeds of whatever new business comes IMF’s way, either in Australia or in the United States, from now until the horizon. As a point of reference the trailing diluted earnings per share is 29 cents. I think that's an unreasonably low-priced option on IMF's future cash flows.


In more conventional valuation language, IMF is a fast growing business, with 15% insider ownership,  paying out substantial dividends, returning 60% on its invested capital, and trading at an implausible EV/EBIT multiple of 3x.


*I made that up.

2 comments:

  1. Post is from awhile ago, but trying to reconcile your math on this one...

    The ROI numbers given in the IR presentation (~300%) excludes overhead.

    Therefore, wouldn't 310% * Intangibles = "Litigation Contracts in Progress - Settlement" i.e. Note 7 in the 2013 AR.

    This is a revenue number, and it's before expenses on litigation contracts.

    Take out another 40% of these expenses (i.e. 60% GM on the settled cases), and you get Litigation Revenue, or "Other Income"

    Then you can take the 60% net income number (even though it looks closer to 53-55% over the last 7 years), to get net income.

    So, using your #s:

    3.1 * 62 = $192.2m in gross settlements

    @ 60% GM on settled cases = $115m in litigation revenue

    less: operating expenses @ 40% of sales (60% NI margin) = $69m in net income or $0.47/share

    That's still not bad, getting ~30% of the purchase price back over the next 2.3 years, but it seems like you are still paying quite a bit in option value.

    Let me know what you think.

    And curious why you never invested?


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  2. You're quite right: using 2013 intangibles number,
    3.1 x 86 x 60% x 55% = 88 million on a current market cap of 207. So, two or three years, as you say.

    I like the stock then and I still like it. At the time there were quite a few clearer opportunities in the UK and elsewhere and I suppose I had the luxury of waiting for a possible sell off in the ASX and AUD. And when a reasonable sell-off occurred this year, Emeco seemed to me a less uncertain bet.

    (Despite the current disarray in my portfolio, I generally like to keep it limited to 4 or 5 names at a time).

    Thanks for prompting me to look again at this name.


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