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 (http://www.mccabeterrill.com.au/media/45715/Litigation%20Funding%20in%20Australia.pdf)

(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"... :D :rolleyes:

[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.

[Lizard]

Off a cliff this morning as it looks like the Federal govt will legislate to reverse the Sons of Gwalia decision. Will probably affect other litigation claims as well.
:(

The risks of litigation.

[Lizard]

Complete chaos on IMF this morning - finally halted after falling over 15% and IMF eventually got their act together to announce that the legislation was unlikely to have much affect on IMF since it was unlikely to be retrospective.

Market less than convinced so far as still off by 26cps.

[drillfix]

Hey Liz, please dont take this the wrong way but I hope you have pulled your Rip cord on this one.

Next support is 1.56 and then 1.44, then 1.32 after that.

[lewinsky]

Hopefully you are right Drill and the lemmings jump and drive the price down so I can buy more at lower prices.

[drillfix]

Hi Lew,

I dont know if I am right or wrong as all I see is a Big Red/Black candle. Dont know the news or the FA on whats happened.

It reminds me of Bannerman Resources (BMN) after they brought out some news that was not quite favourable or the market basically read it the wrong way and the results is similar to this.

Take a look at the chart and have a quick study of the after effects.

Not every stock is the same as you know and this stock is in a totally different sector so that probably makes me sound like Im just waffling on :rolleyes: :p

[lewinsky]

IMF is moving ahead after another good half yearly result and a 10% dividend payout.

They have a strong forward book, including a large claim against the Australian Banks (and we all love them with a passion !!)

Price has increased from $140 to $1.76 since the middle of January.

Always going to be a bumpy profit ride, due to the number of cases they have on their books.

What I call, a good bottom draw stock.

LEW.

[drillfix]

Hi Lew, been a while since anybody posted here.

The last 3 days for IMF have been huge. What a rally.

At some stage this is gonna want to chill out for a breather though.

[Lizard]

Hi Lew,

Yes, still holding some of mine, although can't really post about what a great trade they've been... as you say, are always going to be bumpy, depending on caseload and timing of settlements. But underlying caseload is strong and they are not too tied to the general economic cycle, so I have them for the portfolio that holds longer term.

[lewinsky]

Hi Lizard,

Ditto.

[Lizard]

Result out. Not much to add - very hard to comment on such a bumpy business - but with 36% of case load expected to "mature" during the current financial year, it might be a good year for IMF holders. Move into the US also seems well thought out, so might be what is needed to hoist up caseload to the next level.

[ozzie]

Under the Radar on IMF:


This litigation funder is a world leader and is set to deliver big
dividends on the back of a capital injection.


REWARDS FROM BEING A PIONEER


Intuitively IMF doesn’t seem like the sort of company that should be listed. After all, the company
funds large legal cases in exchange for a share of the settlement. That is, if its client wins!
12 years ago it started doing this in Australia and it was also the first to do it in the world. Any
lawyer’s biggest asset is his or her intellectual property, and as the first to start doing this, and
doing it successfully, IMF has accumulated a great deal of IP.


To date it has collected $1.4bn in monies for plaintiffs, which means its clients. The client ends
up with 71 per cent and it comes out with 29 per cent over an average of 2.2 years. Out of the
client’s share the lawyers are paid. It says that for $3 it gets in revenues it spends $1 on costs.
An important consideration is litigation risk, which not only includes losing a case and not being
paid, but also judicial delays and increasing competition. Fortunately, IMF’s record has been
good. Over the year to February it had funded 137 legal cases of which 93 were settled, 27 were
withdrawn, 12 were won and five were lost.


CRITICAL MASS
The model is working because about four years ago it achieved critical mass with $1.6bn worth of
cases on its books.


Having this sort of work on its books gives it confidence. The $86m it has on its balance sheet as
at 30 June that was listed as an intangible asset, is the amount it spent on cases currently under
management. It expects to get three times that amount back in revenues in just over two years.
That confidence is backed up by its high return on equity. Its average exceeds 23 per cent in the
past seven years, and is aided by an extremely low cost base – the group only has 28 staff. It has
also enabled it to pay out big dividends.


LITIGATION IS FICKLE
Last year illustrated the fickle nature of the litigation business. Its net profit fell from just under
$43m in fiscal 2012 to just under $14m. In order to provide a buffer against this, IMF makes sure
its cash levels are maintained above $70m. Anything over this is paid out in dividends.
Consequently, its dividends were halved from 10 cents in fiscal 2012 to 5 cents last year. But it is
easy to predict that dividends will bounce back next year following a capital raising that means
the company can pay out as much as 23 cents in the current year giving the stock a yield of over
13 per cent – fully franked to boot.

BUYING OPPORTUNITY
A big reason for recent selling activity in the stock and in our view, a buying opportunity is the
dilution that has resulted in the recent equity raisings and the note conversions – the shares on
issue have increased by about 13 per cent. In early October IMF raised $40m in stock at $1.70 a
share and about 95 per cent of the circa $40m in convertible notes are converting at $1.65.
The growth in earnings in IMF will come from increasing cases domestically as a result of its
big cash reserves. Longer term, and more importantly, it will come from the beach heads it has
established in the giant UK and US markets.


OFFSHORE EXPANSION
It opened an office in Los Angeles two years ago. The US has a long history of contingency fees,
where lawyers receive a percentage of the payout, but there has never been competition in
litigation funding. Instead of paying the lawyer 25 per cent, the US client would pay a funder like
IMF and then pay the lawyer the hourly rate.


It is a model that works and has delivered big returns for shareholders. On a current PE ratio of
just over 7 times and on a dividend yield of 13 per cent, it seems a good investment.

[ozzie]

Also:

Why we like it


This company is the first to take on the
business of funding litigation successfully.
And now it has critical mass. For the past
four years it has had $1.6bn worth of
cases that it is managing. The company
has a consistent record of achieving over
20 per cent return on equity and now
that it has raised $40m it has flexibility
to increase dividends paid and maintain
$70m in cash.


What ’s new?


IMF has raised just over $40m in equity
since early October at $1.70 a share to
pay out convertible note redemptions
and increase its cash reserves to fund
increased litigation. Most of the notes are
converting because their face value is
$1.65, so the company should have over
$100m of cash and no debt. Over the
longer term growth is anticipated from
the giant US and UK markets where it has
established small operations.

[babymonster]

Ordered to buy 1500 at 2.23 today. Only got 877 shares with that price and the sp jump to 2.31. I m with ANZ, does anyone know what happen to the rest of my order?

[Snow Leopard]

Ordered to buy 1500 at 2.23 today. Only got 877 shares with that price and the sp jump to 2.31. I m with ANZ, does anyone know what happen to the rest of my order?

Do not deal with ANZ but probably...

You order will have a 'good for' period of N days. If it has not completely filled by the deadline then it will expire at that point.

You can cancel the rest of the order, wait to see if the price comes back to your price or modify the order (in quantity and/or buy price) to try and fill it.

Best Wishes
Paper Tiger

[babymonster]

Thanks you.


Do not deal with ANZ but probably...

You order will have a 'good for' period of N days. If it has not completely filled by the deadline then it will expire at that point.

You can cancel the rest of the order, wait to see if the price comes back to your price or modify the order (in quantity and/or buy price) to try and fill it.

Best Wishes
Paper Tiger

[DarkHorse]

Up to $2.44 today. Excellent 1/2 year result - revenue up 111% net profit up 152%, 2015 PE 11 ... took the market a couple of days to fully respond

[babymonster]

I wish I had bought more

[babymonster]

It's a good time to add more lately.