Bargain shares: Backing litigation funding winners

Litigation Capital Management (LIT:121p), a provider of litigation financing that enables third-parties to pursue and recover funds from legal claims, has entered its third major litigation finance agreement in the past seven weeks.

The company has agreed to provide a litigation finance facility to Edward Vermeer and David Boyle in an application to commence a collective action launched in the Competition Appeal Tribunal against Govia Thameslink Railway and its parent companies, The Go-Ahead Group and Keolis (UK) Ltd. The facility will fund a claim alleging Govia abused its dominant position in the market for rail services on the London-Brighton mainline, in breach of the Competition Act 1998. 

Since mid-May, Litigation Capital has also entered agreements to provide liquidation finance to a partner of FRP Advisory, additional liquidator of the former Comet Group, to cover proceedings issued in the High Court against Darty, a multi-national electrical retailer based in France; and is providing litigation funding for a claim against the former auditor, KPMG, of Carillion, the largest corporate collapse in the UK building and construction industry.

The opportunities to provide litigation funding on new cases remain favourable given the benign market environment and the instability brought about by the Covid-19 pandemic. That’s because the pandemic has led to an increased number of insolvencies, bankruptcies and restructures, which in turn is driving an increase in investment opportunities.

In addition, Litigation Capital’s fast-growing fund management business is set to get a major boost. It currently manages A$322m of investments including a US$150m (£109m) third-party fund. As soon as the final investments for the US$150m fund are approved by Litigation Capital’s investment committee then a follow-on US$300m fund will be launched. Litigation Capital receives 25 per cent of profit on each fund investment over a soft hurdle rate of 8 per cent, and earns an outperformance return fee of 35 per cent over an internal rate of return (IRR) of 20 per cent, so this is a lucrative income stream. It’s achievable, too, given that Litigation Capital boasts a cumulative IRR of 78 per cent over the past decade.

Investors have taken note which is why the share price rallied 25 per cent to hit my 140p upgraded target price since my last article (‘Upgrading target prices’, 22 June 2021). The holding has also produced a 56 per cent total return on the entry point in my 2019 Bargain Shares portfolio. However, following a bout of profit-taking, the shares are currently rated on a forward price/earnings (PE) ratio of 10 for the 2021-22 financial year even though there is potential to realise further significant windfall gains on the company’s litigation finance portfolio as two-thirds of directly held investments mature within the next 15 months.

In the circumstances, I am raising my target again from 140p to 150p. Buy.

Note 1: Simon advised taking profits on TMT Investments at 580c a share to bank 140 per cent gain including dividend of 20c ('Takeovers, tender offers and taking profits', 9 September 2019), and subsequently advised buying back the shares  at 318c ('On the hunt for recovery buys', 6 July 2020). 

Note 2: Simon advised taking profits on Futura Medical at 34p a share on Monday, 14 October 2019 ('Bargain Shares: golden opportunities', 14 October 2019). The selling price is used in the performance table.

Note 3: Simon advised selling Mercia Asset Management at 27.5p a share on Monday, 9 December 2019 ('Taking stock and profits', 9 December 2019). The selling price is used in the performance table.

Source: London Stock Exchange opening offer prices at 8am on Friday, 1 February 2019 and latest bid prices or when Simon advised exiting the holding.

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