It hasn’t taken long for Sydney-headquartered Litigation Capital Management (LIT:93.5p), a leading provider of litigation financing to enable third parties to pursue and recover funds from legal claims, to make its mark on London’s junior market.
That’s because the company has reached a settlement in principle in respect of one of its litigation projects relating to an open class action it funded on behalf of former shareholders in a resources company that was formerly listed on the Australian Stock Exchange. The defendant is an international professional services company. The terms of the settlement remains confidential, and subject to court approval, but I can reveal that Litigation Capital Management will book a bumper cash profit of between A$8-10m (£4.3m to £5.4m) on its investment in the current financial year to 30 June 2019. It will also recover all monies invested.
Class actions represent one of several types of litigation project that Litigation Capital provides funding for across single-case and portfolio funding, as well as international arbitration, commercial claims and claims arising out of insolvency.
To put the aforementioned return into perspective, the company only invested in the case 21 months ago and is guiding shareholders to expect a return ahead of the cumulative internal rate of return (IRR) of 78 per cent and cumulative return on invested capital of 117 per cent made on all its cases since 2012. These eye-watering returns highlight the quality of Litigation Capital’s approach to funding litigation projects. It’s also the reason why I selected the shares in my 2019 Bargain Shares Portfolio.
This is the fourth litigation project that it has completed since June 2018, and there are solid prospects for further positive newsflow and realisation of healthy profits on Litigation Capital’s investments in other ongoing claims. Indeed, there are 24 projects in its current portfolio which have a total budget of A$91m. The balance of investment to be made in these cases is A$70m, a sum well covered by Litigation Capital’s net cash pile of $52.6m (24p a share), and proceeds from the case that has just been settled. Furthermore, the company is targeting an additional pipeline of 64 litigation projects, which have an estimated capital commitment of A$409m (£221m).
Litigation Capital has also announced that it has entered into a global cooperation agreement with a leading London-based international law firm, which operates across six continents through a network of 50 offices and over 400 partners, to finance disputes undertaken by the law firm and its clients. The law firm is one of the most active in the litigation space globally and works with clients across sectors including aviation, energy and natural resources, infrastructure, trade and commodities, and insurance. Litigation Capital will make available significant funding for disputes as and when they arise, assuming that they meet management’s rigorous due diligence process.
Importantly, the agreement boosts the number of potential funding opportunities available to Litigation Capital. The shares have reacted positively to the newsflow, up by 20 per cent on my buy-in price of 77.5p, and are priced on 2.4 times pro-forma net asset value, a multiple that is set to drop sharply if, as I strongly suspect it will, Litigation Capital continues to produce eye-catching returns on its portfolio. Buy.
Palladium and rhodium surge boosts Sylvania
Shares in Aim-traded Sylvania Platinum (SLP: 30p), a fast-growing and low-cost South African producer and developer of the platinum group metals (PGMs) platinum, palladium and rhodium, surged by 50 per cent to an eight-year high of 31.95p a share after I highlighted the chronic undervaluation five weeks ago (‘Playing the commodity complex’, 18 February 2019). Longer-term holders have done well, too, as the price has now doubled on my 14.75p original entry point in my 2018 Bargain Shares portfolio. The rerating is fully justified.
That’s because the price of palladium and rhodium have been booming, up 23 per cent to $1,600 per ounce (oz) and 25 per cent to $3,050 per oz, respectively, since early February. That’s good news for the platinum group metals (PGMs) Rand basket price that is made up of the key metals Sylvania recovers from PGM-rich chrome tailings material from mines in South Africa's North West Province. The rough split is 62 per cent platinum, 24 per cent palladium and 14 per cent rhodium. This improves the chances of Sylvania producing an earnings beat in the coming months. Let me explain why.
Analysts at house broker Liberum Capital currently predict that Sylvania will produce 74,500 ounces of PGM production in the 12 months to end June 2019, split 34,000 ounces in the first half and 40,500 ounces in the second half. On this basis, they forecast revenues of $71.1m, up from $62.7m in the 2018 financial year, based on the following metal prices: platinum $819 an oz; palladium $1,227 an oz; and rhodium $2,493 an oz. However, the current palladium price is 30 per cent above that level and rhodium is 22 per cent higher. Palladium remains in multi-year deficit, so the market is very tight, a situation that is being exacerbated by demand from the automotive sector. The same is true for rhodium as its major use (around 80 per cent of global production) is as one of the catalysts in the three-way catalytic converters in cars.
Even without factoring in potential earnings upgrades, Liberum is forecasting that Sylvania’s pre-tax profit will surge by 65 per cent to $26.6m in the 12 months to end June 2019 to drive up earnings per share (EPS) from 3.8¢ to 6.6¢ (5p). Moreover, I expect net funds of $20.2m (5.4p a share) at the start of 2019 to grow in the second half after factoring in the company’s capital spending plans. On this basis – and I stress this is before factoring in any upgrades – the shares are priced on a price/earnings (PE) ratio of six for the current financial year to end June 2019, and on a cash-adjusted PE ratio of 5. Liberum also expects the dividend per share to treble to 1.94¢ (1.5p), implying the shares offer a 5 per cent prospective dividend yield.
I would also flag up that Liberum’s forecasts for the 2020 financial year – pre-tax profits of $32.2m, EPS of 7.8¢ (5.9p) and dividend per share of 2.36¢ (1.78p) – are based on respective PGM prices at levels well below the current spot rate. On this basis, the cash pile could rise by half to $30m, or 8p a share, implying the forward cash-adjusted PE ratio is less than 4.
So, not only are Sylvania’s shares incredibly lowly rated based on current-year forecasts, but predictions of increasing levels of profitability are well supported by strong industry demand for palladium, rhodium and by-products (Iridium and Ruthenium), tight supply, and scarcity of the commodities. In the circumstances, and ahead of next month’s third-quarter production report, I rate Sylvania’s shares a buy and raise my target price to 35p. Buy.
Viva Volvere
In a pre-close trading update, Aim-traded investment company Volvere (VLE:1,200p), a constituent of my market-beating 2016 Bargain Shares Portfolio, has announced that its net asset value per share surged by 89 per cent to 1,248p in 2018.
As I noted when I last updated the investment case (‘Bargain shares: On the M&A beat’, 22 October 2018) after the company announced the disposal of its largest investment, Impetus Automotive, a provider of consulting services to the automotive sector, the sale would produce eye-watering returns for Volvere’s shareholders. In fact, the company has received net proceeds of £26.1m for its 83 per cent stake in Impetus, a thumping premium to the £4.8m carrying value of the investment and 21 times the £1.25m capital Volvere originally invested in March 2015. This also highlights the midas touch of Volvere’s founders, Jonathan and Nick Lander, who have the respective roles of chief executive and finance director, to successfully invest in distressed and undervalued businesses with a view to turning them around and exiting at a hefty profit.
The disposal leaves Volvere’s balance sheet in a rude state of health. Net cash of £34.1m equates to 1,093p a share, which means that the company’s 80 per cent stake in Leamington Spa-based food manufacturing business, Shire Foods and a small software firm Sira Defence that develops products to help the police use CCTV effectively, are effectively in the share price for around 100p a share, or £3.1m. That seems harsh given that Shire has just reported a pre-tax profit of £0.79m, up 23 per cent year on year, and Sira has entered into a number of reseller partnerships that are “expected to make a contribution in 2019 and beyond”.
True, Volvere’s shares are at an all-time high and have risen by 150 per cent on an offer-to-bid basis since I advised buying, at 419p, in my 2016 Bargain Shares portfolio. However, given the Landers' mightily impressive track record – Volvere’s book value per share has increased at a compound annual growth rate of 17 per cent since the company listed its shares, at 100p, on Aim in December 2002 – then they are still worth backing and I would run your profits ahead of news on the next turnaround situation they plan to invest in. Volvere’s annual results will be announced on Friday, 24 May 2019. Run profits.
Capital return for PV ypdbooks shareholders
Solar wafer maker PV Crystalox Solar (PVCS:25p) has announced a £38.5m capital return to shareholders, a sum worth 24p a share, which will be made before the end of June 2019. Having wound down its operations in recent years, sold down stocks and cleaned up its balance sheet, annual results reveal that the company had net funds of €54m (£47m) at the end of 2018, a sum worth 29p a share at current exchange rates. Year-end NAV of €52.3m (£45.5m) equates to 28p a share.
What’s left is a glass and quartz cutting operation in Germany that services chipmakers and the optic industry that could be sold to management or a third party. That’s possible, but third parties haven’t exactly been rushing to express an interest in doing so. Moreover, having endured a rollercoaster ride since I included the shares, at 19p, in my 2014 Bargain Shares portfolio, I am inclined to take the 25p market price given that potential for further share price upside looks limited in the near term as could be the scale of any further capital distribution if it is made. Take profits.
■ Simon Thompson's new book Successful Stock Picking Strategies and his second book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £2.95, or £3.75 if you purchase both books. Details of the content of both books can be viewed onwww.ypdbooks.com.
