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Profit from astute Litigation Capital Management

The Sydney-based provider of litigation financing is set to book a hefty return from a legal case in Australia.
June 5, 2019

Amid the market volatility during the past fortnight, investors have failed to pick up on an important announcement from Litigation Capital Management (LIT:92p), a Sydney-based provider of litigation financing to enable third parties to pursue and recover funds from legal claims.

Earlier this year, the company announced that it 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. According to my sources, I understand that the case is the class action lawsuit of Discovery Metals shareholders vs. KPMG. The point being that the Supreme Court of New South Wales granted the settlement final and binding on the parties last week.

Furthermore, Litigation Capital’s chief executive Patrick Moloney is now guiding shareholders to expect cash profits from this project to be ahead of the directors’ earlier guidance of A$8m-A$10m (£4.4m to £5.6m). Analysts believe that the return on invested capital (ROIC) on this particular project could be in excess of 200 per cent, highlighting both the attractive returns from litigation funding, and Litigation’s Capital’s ability to pick the right cases to back in the first place.

I can also reveal that Litigation Capital currently has a portfolio of 28 litigation projects under management of which 18 are unconditionally funded and 10 are conditionally signed. These include proceedings in Hong Kong brought on behalf of a company in liquidation alleging breach of contract and negligence against a Hong Kong company. The capital commitment to be provided by Litigation’s Capital is in the order of US$965,000. It is also providing a capital commitment of US$1.5m in an ICC arbitration case in London brought on behalf of a hotel and hospitality developer against a large global company.

In addition, Litigation Capital has a pipeline of 65 projects across a mix of litigation financing including commercial, international arbitration, insolvency, class actions and corporate portfolios. The potential investment across all these projects is in excess of A$400m (£222m) and reflects the global nature of the business with projects in Australia, the Asia Pacific and EMEA. The company is undertaking due diligence, or in advanced negotiations with respect to nine corporate portfolio transactions. As the portfolio of cases grows, in turn this reduces earnings risk.

The point is that the value of the portfolio is being very conservatively valued as Litigation Capital uses the cash value of litigation investments instead of their fair value. As can be seen by the Supreme Court of New South Wales, fair value can be a multiple of the cash committed to the cases. In fact, analysts at Arden Partners estimate that spot price-to-book value falls sharply from 2.4 to 1.7 times after marking projects to fair value – representing a significant discount to other listed peers. They also predict that Litigation Capital’s annual pre-tax profits will rise by more than half from A$9.5m to A$14.9m in the financial year to end June 2020 to deliver earnings per share (EPS) of 10c (5.6p) and support a dividend of 3.1c (1.7p).

Having first advised buying the shares, at 77.5p, in my 2019 Bargain Shares portfolio, the share price subsequently rallied to 115.75p after I last suggested buying, at 93p (‘Bargain shares on a tear’, 25 March 2019). The pull-back since the start of May is a repeat buying opportunity and one that potentially offers 50 per cent upside to my 140p target price. Buy.

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