Bentham IMF (IMF)

Fat Prophets

Friday 2nd May 2014

What’s new

We regard commercial litigation funder, Bentham IMF, as an interesting investment opportunity with low correlation to the broader market. The company is increasingly becoming a global player, having previously opened a US office and now having signed an agreement with US investment group Elliott Management headed by activist investor Paul Singer. The deal will assist the company in funding cases throughout Europe and co-fund larger cases in the Asia Pacific.

Outlook

In our view, the deal with Elliott Management opens up a new horizon of attractive opportunities for Bentham IMF, and positions the company to become a global leading litigation player.

In the meantime, Bentham IMF’s existing portfolio of cases is deep and growing. The latest addition to the portfolio is a funding agreement recently struck on matters involving the failed Perth-based construction and engineering company Forge Group (which went into administration in February of this year).

Furthermore, Bentham IMF announced a number of conditional settlements over the past few months. For instance, the company recently announced a settlement of the Downer EDI claims, with the terms confidential to the parties involved. It is estimated that Bentham IMF will generate revenue of $11 million and profit (after capitalized overheads but before tax) of about $10 million.

Another conditional settlement that advanced to final settlement was the one involving claims by Hastings Capital against CBRE Pty Limited. While the settlement is a small one (estimated revenues to Bentham IMF of about $2 million and pre-tax profit after capitalized overheads of about $1 million), it is just another example of the company successfully monetising its portfolio of cases.

Price

While shares in Bentham IMF are down 5 percent over the past 12 months, they are largely unchanged over the past 6 months. Given the lumpy nature of the company’s earnings and the difficulty in forecasting profitability, the stock is not well covered by brokers in the market. However, with market capitalisation now over $300 million, a growing portfolio of cases and now expansion aspirations overseas, we see bright long term prospects for the litigation funder.

Worth Buying?

Bentham IMF boasts a strong management team, an enviable deal flow and a diversified portfolio of cases. Granted, future earnings are difficult to estimate, particularly in regards to what timeframe various settlements fall in. Nevertheless, the stock is currently trading on circa 6.5 times consensus earnings estimates for fiscal 2015. We view this as inexpensive given the solid outlook and the potential to return a significant dividend if successful in its cases over the next couple of years.

Consequently, we believe the stock is worth buying at current levels.

Greg Smith is the Head of Research at Fat Prophets.

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