- Adjusted operating profit up 23 per cent to A$20.2mn
- Two-thirds of second third-party fund raised
Litigation Capital Management (LIT:72p), a provider of litigation financing that enables third parties to pursue and recover funds from legal claims, issued a profit warning over the summer, citing Covid-19 related delays and disruption to the justice system.
In the event, adjusted operating profit increased 23 per cent to A$20.2mn on 28 per cent higher revenue of A$47.3mn in the 12 months to 30 June 2022. Commitments of A$104mn, including third-party funds, were only slightly down on the previous financial year, which in turn helped deliver 23 per cent higher assets under management (AUM) of A$414mn, subsequently rising to A$452mn post the period-end.
Importantly, over $200mn of the group’s second third-party fund has been raised from investors and the directors expect it to close by the end of 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. In the past 11 years, the group has delivered an IRR of 79 per cent on all completed cases inclusive of losses, so managing third-party funds is one way to leverage this impressive track record.
Analysts at Investec have reset their profit expectations to into take account a more realistic profile of liquidity events and are now predicting annual pre-tax profits of A$25.3m and $47.7mn for the next two financial years, materially below previous estimates. This implies EPS of 9.6p and 18p, but there is a degree of risk to the timing of likely settlements. Currently, six investments are awaiting judgements or award and a further six final hearings are due within the next six months. However, with the shares trading on only 1.5 times book value, and a forward price/earnings (PE) ratio of eight, the potential for the group to continue delivering such high investment returns is modestly priced even if the duration of investments is expected to lengthen from 27 months historically to 36 to 42 months.
So, although the share price has dipped slightly below the 77.5p entry point in 2019 Bargain Shares Portfolio, I feel that holders will ultimately be rewarded. Recovery buy.
Simon Thompson was named Journalist of the Year at the 2022 Small Cap Awards.
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