IMF Ltd - A Winning Streak

[Lizard]

I have just been looking through the fundamentals of IMF Ltd (code IMF) - pointed out by Lewinsky on another thread.

Current share price $1.56, market cap $192m.

IMF is a litigation funder, booking to profit any gain made on corporate litigation. IMF Ltd entered the ASX via a back door listing in October 2001 when Insolvency Management Fund Pty Ltd was backed into tech-wreck shell, MXM. After an initial run-up in the share price, the company has tracked sideways for around 5 years, recording bumpy profits dependent on the timing of litigation settlements.

However, during this period, the company appears to have built their resources both in terms of cash and number of litigation cases to be settled. This has led to profitable success in the past 2 years and a recent lift-off in the share price. Since returns on litigation funding can be quite high when successful (>50%), the company has the ability to quickly build on success by adding additional cases. However, timing and success are inherently uncertain and results can be heavily skewed by the outcome on just one major case. This makes it a difficult company to value.

Right now, IMF are in something of a "sweet spot", with the GFC having handed them some potentially very profitable cases. Combine this with strong cash position built up in the resolution of recent long term cases like Aristocrat Leisure and Sons of Gwalia, and IMF now have an advantageous position. Furthermore, their successes to date are likely to encourage further litigation cases.

Looking ahead, the litigation book forecast to be settled in the next two years appears to increase exponentially. Should IMF achieve recent levels of success (and of course this is not guaranteed), it is likely that the shares will rise strongly.

Conservatively assuming that litigation cases fall away after this period, I'd still value IMF at around $2.20/share. However, I'd consider it quite likely that the share price trades above $4.00 within the next two years. Though bear in mind that success or failure in litigation can push the value around quite wildly.

Note that the risks to IMF include an increase in competition in this area and likely reduction in returns. However, IMF have a good head start in terms of market position within Australia. Note also that recent court cases have supported the use of a litigation funder, whereas in the past it was not always permitted in Australia.

Some relevant info on litigation funding is found here:
Litigation Funding in Australia - April 2009

(Don't yet hold, but considering buying some)

[Snow Leopard]

I ran the ruler over IMF back in late Feb and liked them a lot then.

They re-appeared on my radar again nearly two weeks ago and I still liked them.
I agree with you concerning the future and I have a short term value of $2.10 on them with potentially a lot or more upside than downside looking forward.

I would say they are currently a buy and the only reason I don't buy some is that I am fully committed chasing something else at the moment.

regards
Paper Tiger

[lewinsky]

Hi Liz,

Thanks for your review of IMF. As always your analysis is very sound.

IMF appears to be undervalued and I agree with your rating, although tempered at the moment by outside influences.
They appear to have gone through the pain of building a presence and now have a market dominant position, with good management and a good business model.

I am looking to add as one of my core stock holdings.

I am sure litigation is going to be around for a while yet.

LEW.

[Footsie]

looks good LIZ
Dont know about $4.00

but 2.20 certainly achievable.

[Lizard]

Thanks for the comments on this one. I bought a few this week at $1.53 - I'm not the fastest gun on the "buy" button when the chart turns up!

Actually, I'm ambivalent about buying shares right now, but IMF not as correlated to economic performance as some. Will see how it goes.

[lewinsky]

IMF now trading at $1.71 so LIZ after tipping IMD a couple of years back it just proves that I am strong on IM shares.
Seriously though, the settlement that they have just announced over the Sons of Gwalia claim should make this a very good year for IMF. They had previously issued a forecast earnings of around $20mill for this year. The Sons of Gwalia claim resulted in a $17 million profit. It would be interesting to know how much of this they built into their forecast.
Still looks very reasonably priced based on current PE, DIV Yield and management structure.
Good luck to holders.

[Lizard]

... after tipping IMD a couple of years back it just proves that I am strong on IM shares.

Haha, Lewinsky. I don't think you should limit yourself to "IM" shares ... there's great profits to be had on anything starting with an "I"...

[Lizard]

I would think the Sons of Gwalia outcome was built into their forecast since the forecast was made two days after the "confidential settlement" announcement, so they should have been reasonably confident of the outcome by then.

Possibly the update on the Lehman Bros case might be driving the upsurge more than the SoG settlement? Not sure of the amounts involved though and not due for settlement until about 2012.

[Lizard]

Ticking upwards here at $1.85. I picked up a few more after the confusion around the MIS scheme ruling pulled the price back. Right choice so far, though it won't rate as "trade of the year".

[lewinsky]

Hi Liz,

You won't make a fortune on this, but fundamently it looks as though it should be trading at over $2.00 and the dividend yield is good.

So this balances out some of the more speculative shares in my portfolio.