An early mover in a growing market
We believe that IMF is an early mover in a new market that is set to grow considerably over the next few years. We are attracted to the high-quality management team and board and the uncorrelated returns of the litigation funding market.
At their core, all Ophir Funds employ the same fundamental, bottom-up research approach aimed at identifying businesses with the ability to meaningfully grow and compound earnings over time, and IMF is a company we have owned for a reasonable period of time.
The first half 2020 result was bang in-line with our expectations, given the company had previously communicated to the market that it would recognise $151 million gross income for the first half from litigation case completions made during the period.
Pleasingly the group is yet to recognise a further $169 million of gross income from 4 investments completed prior to 31 December 2019. One of these investments relates to the successful Wivenhoe Dam case finding stemming from the 2011 Brisbane floods. IMF has estimated that income from this case will range between $100m and $130 million, but flagged that this estimate is conservative with potential for total damages to significantly exceed that range. The timing of the income remains somewhat uncertain however. Whilst the State of Queensland has decided not to appeal, the two other state-owned defendants have not formally stated yet they won’t appeal with an imminent decision expected.
The recently completed Omni Bridgeway acquisition, which assists with the group’s strategic expansion into Europe, is quickly paying for itself. This is a significant acquisition from IMF and increases headcount by nearly 50%. Since 8 November 2019, the Omni Bridgeway portfolio completed 6 investments generating group revenue of $8.7 million, which was in excess of fair value ascribed to these cases. This represents a 118% internal rate of return (IRR) and more than 10% of the closing cash consideration for Omni Bridgeway.
The introduction of a 3-cent interim dividend, its first in two years, was another positive surprise that is reflective of the strong cash generation from IMF Benthman’s business model and its transition from a balance sheet to a funds-based funding model.
We remain attracted to IMF’s defensive growth qualities that sees its underlying earnings uncorrelated to any market or business cycle. Litigation financing is a growing industry globally and IMF is strongly positioned as a global industry leader. We like the structural tailwinds behind IMF and the significant market that they can grow into and expand.
As stated, the group’s portfolio is migrating from balance sheet to fund structures to house investments in litigation case funding. New generation funds improve the quality of IMF’s earnings with a growing component of recurring management fees and a reduced capital requirement to fund future litigation investments.
In our opinion based on its projected FuM growth and growing quality of earnings, the stock looks undervalued relative to peers based on a multiple over normalised earnings.
Looking ahead, further material case completions are expected to fall in the next 6-12 months, which should support cash windfalls in FY20 and FY21.
Funds one, two and three are fully committed and are in harvest mode. The company is currently deploying capital for its new generation funds four and five. One of the key comments the company made at its recent earnings results was it is looking at funding higher value investment cases, which opens the possibility for both funds to be upsized in the future, proving potentially larger payoffs for investors going forward.
We invest your capital the same way we invest ourselves.
At Ophir we employ a fundamental, bottom-up research approach aimed at identifying businesses with the ability to meaningfully grow and compound earnings over time.
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Andrew has over 15 years’ experience in portfolio management of listed companies, stockbroking and economic analysis. Prior to co-founding Ophir, Andrew worked from 2007 to 2011 as a portfolio manager at Paradice Investment Management.