- Total income trebles to A$21.6mn
- First-half pre-tax profit of A$8.9mn
- Full-year pre-tax profit set to double to A$47.7mn
Litigation Capital Management (LIT:98p), a provider of litigation financing, has maintained last year's strong momentum into the new financial year.
In the latest six-month period, the group concluded three cases, which delivered a ninefold increase in cash receipts to A$28.4mn, including A$10.2mn of performance fees from third-party funds. The cases generated a return on invested capital (ROIC) of 3.3 times, well above the 2.8 times average the group has achieved since inception. It also highlights a prudent accounting approach given that ongoing cases held on the balance sheet are valued at A$213mn, or two times cash invested.
It means that, as more cases are settled, the group will book substantial profits from both directly held investments as well as earn material performance fees from third-party funds. This explains why analysts at Investec Securities expect annual pre-tax profit and earnings per share (EPS) to almost double to A$47.7mn and 30.2¢, respectively, on 49 per cent higher revenue of A$77mn. On this basis, the shares are rated on a forward price/earnings (PE) ratio of 6.2 and trade on a modest 1.2 times book value, a harsh valuation on both metrics given the scope for the business to continue to scale up.
An attractive asset management business
LCM’s first fund comprises A$150mn of external capital and is fully committed and the group’s second fund (A$291mn of external capital) is already 35 per cent committed. It should be fully committed within 12 months, a realistic expectation given that economic uncertainty and rising insolvencies are likely to increase the number of legal disputes, which in turn drives demand for litigation capital. LCM is also in an improved competitive position, due to industry consolidation, and in some cases contraction amongst existing litigation financiers.
In terms of the performance fees, LCM receives 25 per cent of profit on each fund investment over a soft hurdle rate of 8 per cent, and an outperformance return fee of 35 per cent over an internal rate of return (IRR) of 20 per cent. This provides an attractive income stream to complement realisations from the directly held portfolio. LCM has delivered an IRR of 67 per cent on a three-year basis.
Other potential share price catalysts include the launch of a third fund, and a sterling retail eligible bond listed on the Order Book for Retail Bonds (Orb) at the London Stock Exchange to provide additional capital to take advantage of opportunities in the market. The drift back in the share price to the entry point in my 2019 Bargain Shares Portfolio is an opportunity worth exploiting, too. Buy.
■ Special offer. Simon Thompson's books Successful Stock Picking Strategies and Stock Picking for Profit can be purchased online at www.ypdbooks.com at the special discounted price of £5 per book plus UK P&P of £4.95, or £10 for both books plus UK P&P of £5.75, subject to stock availability.
They include case studies of his market beating Bargain Share Portfolio companies outlining the characteristics that made them successful investments. Simon also highlights other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Full details of the books’ content can be viewed on www.ypdbooks.com
