As I predicted the company has announced a bumper dividend payment, declaring a payout of 32p a share at a cost of US$47m from the net proceeds from the company’s final two antitrust and competition litigation cases (‘Bargain shares updates’, 15 Apr 2016). This follows the payment of an 8p a share dividend in June and means that if you followed my advice to buy the shares at 41.2p in this year’s 2016 Bargain Shares Portfolio then you will have almost recovered your initial capital.
However, that payout was shy of what I was anticipating, mainly because net proceeds of US$46m from the first of those two cases was below the US$69.1m gross proceeds. Under the terms of the related investment agreement, gross proceeds generated from the investment are received and held by Fields Law Firm PLLC, the counterparty to the company's investment. Deducted from the gross proceeds are taxes and reserves required for certain contingencies. The US$23.2m in reserves held by the counterparty to Juridica’s investment were larger than its investment managers had expected. The good news is that they “believe additional net proceeds will be released prior to 31 December 2017”.
Also, after providing for the appropriate reserves on the other case, US$500,000 in net proceeds were released to Juridica in July. An additional payment from this case is expected prior to the end of 2017 and is “expected to provide in excess of US$1m in net proceeds after deductions for reserves for taxes and other contingencies”. It was the retention of substantial reserves by the counterparty to both of these claims that meant that Juridica’s cash and receivables of $59.2m, or 40p a share, was less than I had expected.
The other issue is that the company has taken an unrealised loss of US$23.8m, of which almost 80 per cent of that sum reflects a change in valuation method applied to its outstanding cases, a significant sum in relation to net asset value of US$126m at the start of this year. It has also written off two investments worth US$800,000, and lowered the valuation of another by $500,000. Factoring in these adjustments, and after taking into account the US$13m cash cost of the 8p a share dividend in June , Juridica’s latest net asset value is now $85.9m, or 58p a share, of which cash and receivables accounts for almost 70 per cent. This calculation is based on 110.34m shares in issue and an exchange rate of £1:US$1.342. The outstanding cases are in the books for US$26.8m, or 18p a share.
The company’s share price fell from 70p to 50p post the announcement, albeit the sell-off really took place in the last 10 minutes of trading prior to the close on Tuesday afternoon after the release was made to the London Stock Exchange. As a result a holding that was showing a gain of over 80 per cent yesterday morning is now only up by 33 per cent.
But is there a value opportunity to exploit?
The question is whether there is scope for Juridica’s share price to recover some of the lost ground? I feel there is because once the shares go ex-dividend on 15 September, and after accounting for the 32p a share cash payment, then the shares are in effect being priced at 18p, or 31 per cent below the latest net asset value of 26p (adjusted for the 32p a share dividend) even though the company retains 8p a share of cash on its balance sheet.
This means that the outstanding cases are being valued at 10p, or 45 per cent less than conservative looking valuations being applied in the latest results. I say conservative because $18.7m of the downgrade in valuation, accounting for 79 per cent of the US$23.8m write-down in the half year accounts, largely reflects the monetisation of Juridica’s remaining investments over a shorter time frame following the board’s request to its investment managers to complete the run-off of the portfolio next year.
I would also flag up that the US$16.5m valuation of Juridica’s five outstanding litigation investments, including reserves retained by Fields Law Firm PLLC, the counterparty to the company's aforementioned antitrust investment, could have upside. That’s because following appeal on one case earlier this year, the investment managers believe that there is a possibility of a new award on damages without the need for a further trial; a patent case is expected to generate further cash proceeds; and another case where damages were awarded in Juridica’s clients favour, but were less than it was anticipating, may go to a further trail on damages.
Also, in early 2014, Juridica invested in four special purpose vehicles primarily to monetise patent and inventions. The four investments have a combined book value of US$5.7m and portfolios held by two of these vehicles are currently being marketed for sale to prospective buyers.
Finally, the company holds four other investments worth a total of US$4.6m and which are not directly related to litigation, one of which is a large, multi-party pre-litigation settlement in the late stages of development. The risk on this case is binary and settlement negotiations are ongoing for a proportion of the opportunity. The US$3.7m carrying value of the investment is accounted for as part equity investment and part intangible asset.
The bottom line is that with several of these remaining investments offering potential to surprise on the upside, and with Juridica’s share price effectively backed by 40p a share of cash, of which 32p will be returned to shareholders shortly, I would recommend holding onto the shares for news of further case settlements if you followed my earlier advice. Hold.
