Company overview
The company is in the business of "litigation funding" which means providing contingency funding for individuals and businesses who have claims for loss and damage. The company provides funding for the case of the client or to the client and, in jurisdictions where adverse costs are applicable, agrees to pay costs incurred during the term of the funding agreement awarded to the other party if the client's case is unsuccessful. In return, the company receives the right of reimbursement for all it has paid out and also receives the assignment of a share of the amount awarded to its client for paid to its client by way of a settlement. In the United States, the company's return is typically a multiple of its investment. As a litigation funder, the company does not itself provide legal advice and does not get paid on an hourly rate basis.
The company is the pre-eminent litigation funder in Australia and has by far a major share of that business in that country. It was listed on the ASX in 2001 and has a market capitalisation in excess of $300 million. Since its inception, it has collected $ 1.6 billion for its clients and its investment managers have the collective experience of more than 100 years in the business. It operates from offices in Sydney and Perth, small groups of staff in Melbourne, Brisbane and Adelaide. It operates in the United States through a subsidiary with offices in New York, Los Angeles and San Francisco and in Europe through a joint-venture. The average life of each case is 2.4 years and the company has, over the last 14 years, averaged a gross return of 157% on funds invested in cases including cases lost or withdrawn.
Among its competitive advantages are its superior risk mitigation processes and expertise in case selection and management. It has people with the appropriate training, knowledge and experience for success, the overall corporate experience to deal with the risks and problems of litigation funding and the necessary financial resources to provide liquidity and strength to aggressive clients. There are multiple barriers to entry for competitors because of the size of costs and the duration of large litigation cases as well as the potential for adverse costs in Australia and the UK. In addition, specialist skills are required to be successful. Australia is among the top five common law litigation markets globally and this company is the clear leader in its home market.
Growth opportunities
There are major growth opportunities onshore which require fresh focus with new products in the insolvency markets and the company has developed new and innovative products to be launched by the end of 2015. Equally, there are major offshore opportunities and the focus will be on similar markets with strong rule of law, established and credible court systems as well as clear laws which work on the system of precedent. Third-party litigation funding has progressed quickly over the last five years in both the US, the UK and the Netherlands and is now a credible alternative for funding. The company has a permanent presence in the US which is experiencing significant growth and joint-venture arrangements are in place to fund litigation in Europe with emphasis on the UK and Netherlands markets. Two cases are currently being funded in Hong Kong and further growth can be expected in Asia. As regards global competition, there are only two other firms in the business competing for international leadership.
The financial highlights for HY 2015
Gross income grew by 131% to $ 77 million and net income by 107% to $ 35.2 million.NPBT grew by 139% to $ 32.5 million and NPAT by 152% to $ 23 million. The dividend was 5 cents per share compared to the same figure for the same period in the previous year and 10 cents per share for FY 2014. EPS was up 100% to 13.83 cents per share and the net asset backing grew 5% to $ 1.25. Case investment, which is an intangible assets, grew 20% to $ 79.1 million while the value of the investment portfolio grew 6% to $ 1.82 billion. The second half of FY 2015 will be negatively impacted by the National Potato case in South Africa is being appealed (impact $ 17.9 million) and the Bank Fee case in Australia which is also being appealed (impact $ 5.5 million) as well as two cases in the USA (of which one is being appealed) a total impact of $ 2.1 million. The strength of the balance sheet is reflected in the cash holdings of $ 134.4 million ($ 105.6 million), investments of $ 79.1 million ($ 98.6 million) and net assets of $ 206.6 million ($ 191.1 million). The company has a dividend history averaging 10 cents per share over the last six years all the dividends being fully franked. As regards future dividend policy, the directors have determined that they will consider and, where possible, pay a regular six monthly dividend based on the cash position and the likely requirement of cash for the year following. The company has also implemented a Dividend Reinvestment Plan and will arrange for underwriting to minimise the impact a particular dividend might have on the cash position.
Source: Company Reports
Track record and future outlook
The track record up to 30 April 2015 shows that 172 cases have been commenced and completed since listing. The average investment period was 2.4 years and revenues of $ 1.6 billion were generated of which just over $ 1 billion or 64% went to clients while the company earned $578 million consisting of $ 225 million by way of cost reimbursement and $346 million by way of net revenues exclusive of overheads. This makes an ROI of 157%. The cost of lost cases including adverse costs and provisions came to $ 30 million and accounted for 6% of company revenues.
Track record
Source: Company Reports
The future outlook includes the development of the international funding platform and staff expansion in the US, the UK and Europe and funding in Hong Kong with a focus on insolvency cases. The investment portfolio will be maintained and expanded to a claim size of above $ 2 billion.. More competition in Australia and internationally reflect the growing maturity of the industry and the company will respond by focusing on opportunities for funding insolvency cases and other products. Potentially, there is likely to be increased regulation in Australia where the Productivity Commission has recommended licensing for litigation funding to ensure adequate capital and proper risk management.
We would point out that litigation funding is a business that involves high stakes and firms in the business would normally fund claims only with a good chance of success because of the high cost of failure. However, adverse verdicts and share price swings are quite common to companies in the business. In view of this company's track record and financial strength and industry position, we believe that there is considerable potential for growth in the share price and would recommend a Buy at the currernt price of $1.765
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