Monday 3rd October 2016
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Aside from the regular flow of case updates, the key news flow from IMF Bentham over recent months has been the company’s full-year results, which were released to the market on 23 August. While IMF Bentham’s share price remains materially below the level it traded at through FY15, it has nonetheless been on a recovery path for most of CY16, outperforming the broader market by around 30 percent over the last six months.
There are in our view two key reasons for the strong rebound in the IMF Bentham’s share price in year-to-date CY16. First and foremost is our belief that investor concerns regarding contagion risks from Slater & Gordon are now dissipating – having been a key reason for the sell-off in IMF Bentham’s share price through CY15 on concerns that similar accounting (i.e. revenue and cost recognition) issues would surface at other litigation-related companies, this is now being reversed.
The second and equally important driver of the recent resurgence in IMF Bentham’s share price is the company’s operating performance. By virtue of operating a business that is dependent on case outcomes for earnings, it follows that timing can vary, thus making earnings less streamlined and more volatile or lumpy. This has certainly been the case for IMF Bentham over the last year or so, with the company’s case portfolio having remained robust, albeit with an increased weighting towards larger cases.
There has of course also been a marginal increase in the number of cases that IMF Bentham has funded unsuccessfully. However, this should not distract investors from what has been an exceptional track record since IMF Bentham listed on the ASX. This is evident in the fact that IMF Bentham has only lost 15 of the 187 cases that it has completed over this timeframe, with the collective operating margin on all of these cases being just short of 65 percent.
In our view, the bigger issue for IMF Bentham has been the irregularity of its case completions, with this having resulted in periods of below average earnings (and thus cash flow). While IMF Bentham’s case portfolio remains in good shape (i.e. estimated claim value as at 30 June 2016 of $3.4 billion), the average case length is around 2.4 years, with the timing of any given case outcome (adverse, neutral or otherwise) being a moving target.
While IMF Bentham’s recent results have been below average and the dividend has fallen as a result of this, the company’s cash and net asset generation has remained positive, while investments have increased broadly in line with the portfolio size. Key in this regard has been IMF Bentham’s expansion into North America, with the company having established a presence in New York, Los Angeles, San Francisco, and Toronto.
Assuming the quality of IMF Bentham portfolio remains intact despite the increase in its size, all else being equal this should translate to higher earnings as each case is settled or concluded through the court over the next 2-3 years. While the change in regional composition adds another potential risk to the equation, we see no reason why IMF Bentham cannot continue to deliver a 90 percent strike rate on its cases before the courts (i.e. excluding case withdrawals).
IMF Bentham is currently trading at 9.0 times the earnings estimate for FY17 and offering a dividend yield of 4.8 percent, with this expected to fall to 5.2 times the earnings estimate for FY18, with the dividend yield jumping to 8.4 percent. Complementary to this, we note that IMF Bentham’s technical set up is also positive, with a sustained break above overhead resistance at $1.89 likely to strengthen the case for a resumption of the long-term uptrend.
While IMF Bentham’s financial performance has been sub-par over the last few years, we remain of the view that the breadth and depth of the company’s case portfolio, in combination with its longer-term track record on case outcomes and its growing presence in the North American markets, will provide a solid platform from which to generate attractive future returns for shareholders. Given this backdrop, we view IMF Bentham’s current per share metrics as offering reasonable value.
James Lennon is a senior analyst at investment research and funds management house Fat Prophets. To receive a recent Fat Prophets Report, CLICK HERE
Disclosure: Evolution Mining is held within the Fat Prophets Concentrated Australian Share, Mining & Resources and Small & Mid Cap portfolios.
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