- First-half pre-tax profit surges from A$0.2mn loss to A$7.5mn profit
- US$150mn third-party fund fully committed and US$200mn already raised for follow-on fund
Litigation Capital Management (LIT:101p), a provider of litigation financing that enables third-parties to pursue and recover funds from legal claims, is well on course to deliver eye-catching annual results. Canaccord Genuity expects pre-tax profit to rise from A$14.5mn to A$33mn in the 12 months to 30 June 2022. That’s consensus, as Investec is pencilling in A$35.5mn and Stiflel is looking for A$29.2mn. Chief executive Patrick Moloney and finance director Mary Gangemi are comfortable with estimates in the market.
They have reason to be, as three direct investments were resolved in the first half and are awaiting payment or resolution of appeals, which de-risks earnings estimates. A further four have had final hearing and are awaiting judgement, and four more cases are expected to have final hearings by the end of 2022. Given that the group has delivered an internal rate of return (IRR) of 79 per cent on all cases in the past 10.5 years over an average investment period of 27 months, a successful outcome to the above cases suggests that Canaccord’s litigation revenue estimates (A$100mn and $137mn for the 2021-22 and 2022-23 financial years, respectively) are well-underpinned. It also means that full-year earnings per share (EPS) estimates of 11p could ramp up to 18p in 2022-23.
Moreover, having received the full US$150mn commitments for Litigation Capital’s first third-party fund, the group has already completed first close of a second fund, which received US$200mn of support from the first fund’s cornerstone investors. Moloney says that it should hit the US$300mn final close before the end of June 2022. 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 IRR of 20 per cent, thus providing an attractive income stream to complement realisations from its directly held portfolio.
It's easy to see why investors in search of high returns are looking to litigation finance. It not only offers countercyclical defensive characteristics, but the asset class should do particularly well in an environment where geopolitical risk and inflationary pressures mean that organisations will be more cautious applying capital to non-core activities. This plays into the hands of third-party litigation funders, as does the ongoing unwinding of government stimulus programmes which should lead to higher levels of insolvency and restructuring cases.
The shares have drifted 10 per cent since my last article (‘Bargain shares: On the M&A beat, 8 November 2021), but are well ahead of the 77.5p entry point in my market-beating 2019 Bargain Shares Portfolio. Priced on 1.8 times book value, and on forward price/earnings ratios of 9 (2022) and 5.5 (2023), the investment risk remains skewed to the upside. Buy.
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