Bentham IMF (IMF)

Wednesday 22nd October 2014

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Fat Prophets

Bentham IMF (IMF)

What’s new?

Bentham IMF’s fully owned US subsidiary is picking up steam after announcing the funding of further cases in August. Last month the company announced that it had a successful outcome which will generate income of $16 million and a profit of approximately $7.6 million before tax and after capitalised costs.

Australia meanwhile provides a strong base for the company, being at least the fifth largest common law litigation market in the world. IMF’s Australian business continues to go from strength to strength, with the funding of the Wivenhoe Dam case, one that is expected to be the company’s largest funded case to date. A Statement of Claim against the State of Queensland and others in respect to the Brisbane Floods was filed in July.

Other recent actions include open class proceedings to enable bank customers who have paid late fees but are not presently a part of original class actions, to be able participate in the eventual outcome.

Last month the company announced a conditional settlement of a confidential matter in Australia, which is likely to generate $2.5 million of income and a gross profit of approximately $1.6 million.

The scale that Bentham IMF has built will allow it to tackle larger cases and aggressive defendants. While predicting how each single case will ultimately fare is difficult to predict, Bentham IMF seeks to stack the odds in its favour and build a portfolio of cases that stand to deliver attractive returns for shareholders.

The company certainly has a formidable track record here, having commenced and completed 159 cases as at 30 June, from the time of it’s listing on the ASX in 2001. The average investment period was 2.3 years and Bentham has collected $1.47 billion from these cases, with approximately 65 percent going to clients ($957m) and $514 million to Bentham, comprised of $189 million in reimbursement costs and $325 million in net revenue. Gross return on investment has been high, at around 273 percent. Only 6 cases have been lost and the company withdrew from a further 35.

Outlook

We expect to see Bentham pursue many more offshore opportunities in the years to come, with offices established in Los Angeles, New York and the UK. The company’s focus will be on similar markets with a strong rule of law, established legal systems with a clear set of statutory laws and legal fraternity.

The company also entered into an agreement with US investment group Elliott Management earlier in the year, and this stands the company in good stead for future deal flow. The deal will assist the company in funding cases throughout Europe and co-fund larger cases in the Asia Pacific.

The agreement provides Bentham IMF with a partner that has very deep pockets, and opens up a far broader universe of potential attractive opportunities, further positioning the company to become a leading litigation player globally.

Third party litigation funding has moved ahead quickly in the US, UK and the Netherlands over the past five years and become more readily accepted as a funding alternative. Competition is relatively limited as well.

Price

Trading in the shares has been volatile of late, but given a strong fundamental picture, and with prices below recent highs, there would appear a reasonable entry point at the moment.

Worth Buying?

We believe the company offers an interesting investment opportunity with a strong management team, good deal flow and a diversified investment portfolio. The tie-up with Elliott Management further strengthens the case for Bentham IMF.

Due to the nature of litigation funding, future earnings are difficult to estimate, particularly in regards to what timeframe they fall in. However, the stock is currently trading on circa 8.7 times consensus EPS estimates for fiscal 2015. We view this as inexpensive given the company’s broad investment portfolio and the potential to return a significant dividend if successful in a number of its cases over the next couple of years.

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

Greg Smith is the Head of Research at Fat Prophets.

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