IMF Bentham (IMF)

Fat Prophets

Friday 28th November 2014

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Fat Prophets

IMF Bentham (IMF)

What’s new?

Following shareholder approval at its AGM earlier this month, Bentham IMF Limited (ASX.IMF) announced a switch around of its corporate name to IMF Bentham Limited. Notwithstanding the name change, the company’s official ASX ticker of ‘IMF’ remains unchanged.

In terms of case funding, in the US, the company announced in late October a new agreement to fund a law firm across a portfolio of cases. This was followed in mid-November by two more agreements, one to fund a commercial dispute and the other to fund a second law firm’s portfolio of cases. On the home front, IMF Bentham announced in mid-November that it had agreed to fund the claims of certain shareholders against ASX-listed Vocation. These claims pertain to alleged misleading conduct and alleged breaches of its continuous disclosure requirements.

There has also been plenty of news on the settlement side in recent months, not least of which was last month’s ruling by the Federal Court in favour of IMF Bentham’s client Desalination Technology, although the ATO has since appealed this decision. While in the US, a settlement update on a US case matter on 19 November has been finalised, with monies to be paid within ten days. All up, IMF Bentham has three cases in their final stages worth around $38 million in revenue and $21.5 million in pre-tax earnings.

Outlook

IMF Bentham is increasingly spreading its wings offshore, significantly bolstering potential opportunities to undertake lucrative cases. At the company’s AGM earlier this month, an update was provided on the US business, which highlighted the increasing geographic diversification of the business. IMF established a US subsidiary in August 2011 and opened its first office in New York and has since expanded this footprint by opening a Los Angeles office in September 2013, covering both the West and East coast.

At the time of the AGM, IMF’s US business had considered 370 funding opportunities and funded 15 matters, with five successfully completed or partially completed. In terms of geography, the company has now funded cases in New York, California, Texas, Indiana, Virginia and North Carolina. At 30 June 2014 the US portfolio equated to $322 million and accounted for 16 percent of the broader company portfolio at that time, while gross revenue from completed cases for FY15 to date is approximately $40 million, with an attributed net profit of $21.7 million.

IMF is also seeking to expand its international funding business in the UK and Europe (particularly in The Netherlands) via its joint venture with subsidiaries of US-based Elliot Management. Elliott is a partner with extremely deep pockets and experience in international litigation. With third party litigation funding having become more readily accepted in these markets, IMF Bentham is now looking at Hong Kong as a potential growth market, particularly in relation to insolvency cases.

Price

IMF Bentham has outperformed the broader market by around 26 percent year-to-date. However, due to the nature of litigation funding, future earnings are difficult to estimate, particularly in relation to what timeframe they fall in. However, based on current consensus estimates for FY15, the stock is trading on circa 9.8 times, which we view as inexpensive given the company’s broad investment portfolio, strong track record of successful litigation and the potential to return a significant dividend if successful in a number of its cases over the next couple of years.

Worth Buying?

We remain favourably disposed to IMF’s strong investment story, a key feature of which is the low correlation between the company’s business model and the broader economy. Combined with its strong management team, good deal flow, diversified investment portfolio, strategic partnership with Elliott Management and current dividend yield of six percent, we continue to rate the stock as a Buy.

Disclosure: Fat Prophets, and interests associated with the company, hold shares in IMF Bentham Limited.

Greg Smith is the Head of Research at Fat Prophets share market research.

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